What Are Active ETFs? A Guide for Investors
- Professional management, low costs and innovation make active ETFs a growing force.
- Active ETFs and mutual funds differ in structure and cost.
- Active ETFs are likely to play an increasingly important role in diversified investment portfolios
Active ETFs are gaining significant traction, driven by investor demand for tactical management during periods of market volatility and economic uncertainty. This surge in popularity has been further fueled by innovations in investment strategies and greater regulatory flexibility.
Unlike their actively managed mutual fund counterparts, active exchange-traded funds generally come with lower expense ratios, greater transparency and intraday trading flexibility, offering investors the opportunity to seek outperformance with more convenience and efficiency.
What Are Active ETFs and How Do They Work?
Active ETFs are exchange-traded funds managed by portfolio managers who actively select and adjust the fund's holdings with the goal of outperforming a benchmark index or achieving a specific investment objective. Like other ETFs, actively managed ETFs trade on an exchange like stocks, offering real-time pricing and liquidity throughout the trading day.
Unlike passive ETFs, which aim to replicate the performance of an index, active ETFs rely on professional judgment and research. Managers can shift portfolio allocations based on market conditions, sector outlooks, economic trends or fund-specific thematic objectives.
Active ETFs vs. Mutual Funds
While both active ETFs and mutual funds involve professional management, they differ in structure and cost. Active ETFs tend to be more tax-efficient due to their unique creation and redemption process, which helps minimize capital gains distributions.
They also offer intraday trading, allowing investors to buy or sell shares at market prices throughout the day, unlike mutual funds, which are priced at the end of the trading day.
Additionally, active ETFs often come with lower expense ratios compared to mutual funds, making them an attractive choice for cost-conscious investors.
5 Top Active ETFs by Assets Under Management
There are 2,057 active management ETFs traded in U.S. markets with total assets under management (AUM) of $933.3 billion. The average expense ratio is 0.71%. Here are the top active ETFs by AUM.
1. JPMorgan Equity Premium Income ETF
The JPMorgan Equity Premium Income ETF (JEPI) invests in low-volatility U.S. large-cap stocks by using equity-linked notes and seeks to produce monthly income through dividends and covered call options.
2. Dimensional U.S. Core Equity 2 ETF
The Dimensional U.S. Core Equity 2 ETF (DFAC) applies a systematic, active approach to target higher expected returns by emphasizing value and profitability factors in U.S. equities while seeking to minimize tax impact.
3. JPMorgan Ultra-Short Income ETF
The JPMorgan Ultra-Short Income ETF (JPST) seeks to provide current income while preserving capital by investing in ultra-short and short-term, high-quality fixed and floating rate debt, including corporate issues, asset-backed securities, mortgage-related debt and U.S. Treasurys.
4. JPMorgan Nasdaq Equity Premium Income ETF
The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) actively and significantly invests in U.S. large-cap stocks comprising its benchmark, the Nasdaq-100 index, while pursuing lower volatility. The fund may also invest up to 20% of the portfolio in equity-linked notes (ELNs) issued by counterparties, including banks, broker-dealers or their affiliates, to provide additional income.
5. Janus Henderson AAA CLO ETF
The Janus Henderson AAA CLO ETF (JAAA) seeks to provide current income by actively selecting AAA-rated floating rate collateralized loan obligations (CLO) securities of various maturities from issuers around the globe.
Pros and Cons of Investing in Active ETFs
Actively managed ETFs have multiple advantages, including professional management and potential for outperformance, but investors need to also understand the associated risks.
Pros
- Professional, research-driven management
- Intraday liquidity and transparency
- Potential for outperformance in volatile markets
- Generally lower fees than mutual funds
Cons
- Higher costs than passive ETFs
- Performance depends on manager skill and market conditions
- Less predictability in holdings compared to index-tracking funds
Who Are Active ETFs Suitable For?
Active ETFs may be suitable for investors seeking professional management with the benefits of ETF structure, including lower costs and flexibility. They can be particularly appealing to those who want to capitalize on market trends, manage downside risk or diversify beyond standard index exposure.
However, they may not be ideal for buy-and-hold investors focused solely on long-term, ultra-low-cost, passive exposure.
Bottom Line
Active ETFs offer a compelling blend of professional management and the flexibility of exchange-traded funds. They provide a cost-effective alternative to mutual funds and a more dynamic approach than passive ETFs.
As innovation continues and investor interest grows, active ETFs are likely to play an increasingly important role in diversified investment portfolios, particularly for those navigating uncertain markets and seeking enhanced return potential.
