What is an ETF?
Exchange-traded funds (ETFs) are investment vehicles that can be bought and sold on the stock exchange. They are often referred to as a basket of securities, as they are made up of multiple underlying assets, like managed funds. However, they are listed and traded on exchanges such as the ASX and Cboe.
ETFs have become increasingly popular in recent years, as they allow investors to hold a range of assets such as bonds, shares or commodities in a single trade. And, in the same way a stock is traded on an exchange, an ETF is similarly traded, so its price adjusts accordingly at regular intervals throughout the day.
What is the difference between a passive ETF and an active ETF?
Of the hundreds of ETFs available in Australia today, there are those that are actively managed and those that track the index. A ‘passive’ ETF is a vehicle designed to track a particular index. It mirrors the holdings of an index and is updated regularly to reflect any changes. Passive ETFs have been around a long time and were designed to provide investors with a cost-effective single security that would track an index.
An active ETF does not aim to track an index. Instead, an active ETF is made up of a portfolio of securities actively managed by an investment team. As they are bought and sold on an exchange, active ETFs are designed to provide investors with access to the investment expertise of fund managers without having to invest in a managed fund.
What are the benefits of an active ETF?
Buying or selling an active ETF can be done through an exchange such as Cboe, and it is an efficient way to gain ownership of a portfolio of shares in the same way as buying an individual share.
- Active ETFs give investors access to actively managed funds that have the potential to outperform a specific benchmark.
- Compared with traditional managed funds, active ETFs give investors higher intraday transparency, pricing, and liquidity. With live pricing, investors can choose which price they would like to invest at.
- An active ETF is a diversified portfolio, and it can be held through a broker or platform provider, making tax reporting and portfolio administration easier for individual investors or self-managed super funds.
- Active ETFs are professionally managed, which means they may be designed for equity investors seeking lower volatility and reduced downside risk in falling equity markets, with the potential for long-term capital growth and some income.
Active ETF vs. Managed Fund
Both active ETFs and managed funds are popular investment vehicles available to Australian investors. There are similarities between the two structures, but there are also many differences.
Diversification: ETFs and managed funds are both designed to provide investors with exposure to a range of asset classes, regions and sectors.
Objective: Both ETFs and managed funds are designed to provide investors with access to a portfolio of securities all through a single investment vehicle.
The Assets: In both structures, the underlying assets invested are held by a trustee on the investors’ behalf.
Pricing: This is a key area where ETFs and managed funds differ. ETFs actively trade throughout the trading day, while managed fund trades close at the end of the trading day. In an active ETF, investors will know the price at which they have bought and sold units at the time they transact on the market. The issue and redemption process for a managed fund will not be known until the unit price is determined for the day on which the application or redemption is accepted.
Trading: Active ETFs can be bought and sold like any other security quoted or listed on Cboe or the ASX. Conversely, managed funds are accessed through intermediaries such as financial advisers and platforms.