Actively Managed ETFs: What Investors Need to Know

We provide an in-depth look at actively managed ETFs and what’s driving their growth.

kent
|
Research Lead
Reviewed by: Lisa Barr
,
Edited by: Lisa Barr

Actively managed ETFs are booming and have taken significant market share from active mutual funds. In this deep-dive article, we discuss the advantages and disadvantages of active ETFs, compare them to passively managed ETFs, explain what’s behind their recent growth and we include a list of top active ETFs. 

What Is an Actively Managed ETF? 

An actively managed ETF is an exchange-traded fund that is managed by a portfolio manager or a team of managers who actively make investment decisions to try to outperform a specific benchmark or achieve a particular investment objective. This is in contrast to a passively managed ETF, which tracks a specific index and does not make any active trading decisions. 

Actively Managed ETFs vs. Passively Managed ETFs 

There are multiple differences between actively managed ETFs and passively managed ETFs, including the management style or investment strategy, potential for returns, fees and manager risk. 

Investment Strategy 

  • Actively managed ETFs are actively managed by a professional investment manager who makes decisions about which securities to include in the ETF's portfolio.  
  • Passively managed ETFs track a specific index and do not make any active trading decisions. 

Fees

  • Actively managed ETFs typically have higher fees because of the time and resources required for the manager and research team to actively seek and identify securities to hold in the portfolio. Higher frequency of trading can also increase costs. 
  • Passively managed ETFs require few resources to manage and operate because these funds passively track the performance of an existing index of securities. 

Potential for Returns

  • Actively managed ETFs have the potential to outperform the market if the investment manager makes better investment decisions than the market. However, there is no guarantee of outperformance.  
  • Passively managed ETFs are designed to track the performance of the market, so they do not have the potential to outperform the market. 

Manager Risk

  • Actively managed ETFs can be riskier than passively managed ETFs because the investment manager is making active trading decisions. These decisions can lead to losses if the market moves against the manager's predictions. 
  • Passively managed ETFs are less risky because they are not making any active trading decisions. 

10 Top Active ETFs by AUM 

The largest active management ETF is the JPMorgan Equity Premium Income ETF (JEPI) with $29.06 billion in assets, as of August 14, 2023. The 10 top active ETFs include a balance of equity funds and fixed income fund. 

List of Top Active ETFs by AUM

TickerFundAUM Expense Ratio1-Yr Return
JEPIJPMorgan Equity Premium Income ETF$29.06B0.35%6.95%
JPSTJPMorgan Ultra-Short Income ETF$23.12B0.18%3.87%
DFACDimensional U.S. Core Equity 2 ETF$21.52B0.17%14.46%
MINTPIMCO Enhanced Short Maturity Active ETF$9.20B0.36%4.62%
DFUVDimensional U.S. Marketwide Value ETF$8.97B0.22%4.97%
DFATDimensional U.S. Targeted Value ETF$8.70B0.28%8.65%
ARKKARK Innovation ETF$7.73B0.75%-18.72
FTSMFirst Trust Enhanced Short Maturity ETF$7.58B0.45%3.95%
AVUVAvantis U.S. Small Cap Value ETF$6.90B0.25%2.73%
DFUSDimensional U.S. Equity ETF$6.84B0.09%15.59%

Advantages of Active ETFs

Active ETFs offer investors many advantages, including potential for outperformance, risk management, customization and tax efficiency. 

Potential for Outperformance 

The primary goal of active management is to deliver returns that exceed the benchmark index. Skilled portfolio managers can use their expertise and analysis to capitalize on market opportunities and generate potentially higher returns. 

Flexibility and Risk Management 

Active ETF managers have the flexibility to adjust the portfolio composition and allocation based on changing market conditions, economic trends and their research insights. This can allow them to take advantage of short-term opportunities or avoid specific risks, such as those associated with a particular sector or country. 

Knowledge and Expertise 

Active management involves the knowledge and expertise of professional fund managers who conduct in-depth research and analysis to make informed investment decisions. 

Customization 

Active ETFs can implement specific investment strategies, such as value investing, growth investing, sector rotation or risk management, based on the fund's objectives and the manager's expertise. 

Tax Efficiency 

The ETF creation and redemption process can make actively managed ETFs more tax efficient than actively managed mutual funds. Active ETF managers may also employ tax loss harvesting strategies by selling losing securities to offset gains and reduce capital gains distributions, or they may hold certain tax-advantaged assets or use futures contracts or options, which can help manage taxes. 

Disadvantages of Active ETFs 

While ETFs have many advantages, such as potential for higher performance and customization, investors should also consider their disadvantages, such as higher costs and potential for underperformance. 

Higher Costs 

Active management involves more research, analysis and trading activity, which can lead to higher expense ratios compared to passively managed ETFs. 

Manager Risk 

While the goal of active management is outperformance, not all active managers consistently beat their benchmarks. The risk of underperforming the benchmark exists, and poorly performing active ETFs may not justify their higher fees. For example, like investors, active managers are susceptible to behavioral biases that can impact investment decisions. Emotional reactions to market movements may lead to suboptimal choices. 

Daily Disclosure Requirement

The daily disclosure requirement for ETFs it can make it more difficult for active managers to implement their investment strategies. If the manager's trades are known to the public, other market participants may be able to front-run them, which is the practice of buying or selling securities ahead of a public disclosure of information about those securities. Daily disclosure can also increase the costs of trading for active ETFs. 

Time and Effort 

Investing in active ETFs requires research and due diligence to evaluate the skill and track record of the fund managers. Investors need to actively monitor the fund's performance and management decisions. 

The Booming Growth of Actively Managed ETFs 

Active ETF assets under management have had impressive growth in recent years, growing from just under $50 billion at the end of 2017 to approximately $340 billion by December 2022. The primary trend is that actively managed ETFs are taking market share from active mutual funds. 

Here are some of the specific trends that are driving the growth of actively managed ETFs: 

  • The rise of factor investing: Factor investing is an investment approach that focuses on specific factors, such as value, momentum or quality, that have been shown to have predictive power over long-term returns. Factor ETFs are gaining popularity among investors who are looking for a way to improve their investment returns. 
  • The growth of thematic investing: Thematic investing is an investment approach that focuses on specific themes, such as disruptive innovation or clean energy, that are expected to grow in the future. Thematic ETFs may be attractive to investors who are looking to get exposure to these growth trends. 
  • The increasing demand for customization: Investors are increasingly demanding customized investment solutions that meet their specific needs. Actively managed ETFs offer a way for investors to customize their portfolios to their specific risk tolerance, investment goals and time horizon. 

Semitransparent ETFs Have Grown More Slowly 

Active ETF growth in assets has come more from the transparent funds than the semitransparent funds. A semitransparent ETF discloses its holdings to the public less frequently than a fully transparent ETF. Typically, semitransparent ETFs disclose their holdings quarterly, while fully transparent ETFs disclose their holdings daily. 

Since active managers were initially concerned that ETF transparency would allow competing investors to front-run their trades, semitransparent ETFs came on the market in 2020. Unfortunately for semitransparent ETF providers, these funds did not enjoy the same growth as fully transparent ETFs. As of December 2022, AUM was just $4.8 billion, according to ISS Insights.  

Bottom Line on Investing in Actively Managed ETFs 

Active ETFs offer the potential for skilled management and the opportunity to outperform the market. However, they also typically come with higher costs compared to passive funds, as well as the risk of underperformance. As with any investment, it's important for investors to carefully consider their investment goals, risk tolerance and belief in the benefits of active management before deciding to invest in active ETFs. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.