Actively managed ETFs: the best of both worlds?

Trackers or ETFs are often synonymous with passive investing. But in recent years, more and more ETFs that are actively managed have also entered the market. So, how exactly do they work? And what’s in it for you as an investor?

What is an actively managed ETF?

An ETF tries to track an index - such as the Nasdaq, S&P 500 or Bel20 - as closely as possible. Simply put, if the index increases by 2%, the value of the ETF will also increase by 2% (slight deviations are possible). With an ETF, you can invest indirectly in all shares or bonds of that index. This way, you can invest indirectly in dozens or even hundreds of securities in one go. If you opt for a mutual fund, you also invest indirectly in a basket of different shares or bonds. An important difference with an ETF is that there is a management team at the controls. The manager and his/her team seek to outperform their benchmark index. So they select stocks or bonds that they think can perform better. In recent years, more and more actively managed ETFs have also entered the market. An actively managed ETF is actually more like an investment fund than an ordinary ETF. Instead of passively tracking an index, a manager takes targeted positions in various stocks or bonds. An actively managed ETF has characteristics of both ETFs and mutual funds.

What about the return potential?

As actively managed ETFs have only emerged in recent years, it's too early to judge whether they can outperform traditional, passive ETFs and mutual funds over the long term. However, due to the combination of expert management and lower costs compared to traditional investment funds, they appear to be an attractive option for investors looking for a middle way. In Europe, the average ongoing charges for actively managed ETFs have also dropped sharply to 0.28%. As a result, they have sometimes become as expensive (or cheap) as some passive ETFs. Investors already seem to have found their way into this young segment: actively managed ETFs in Europe raised EUR 6.7 billion last year, compared to EUR 2.4 billion the year before.

What are the benefits of actively managed ETFs?

Actively managed ETFs tend to focus on specific investments within a theme, with the aim of outperforming (passively managed) ETFs. Unlike their passive counterparts, which are tied to a fixed index and are adjusted only periodically, actively managed ETFs can quickly adjust positions based on current analysis and insights. This allows the manager to react to market changes and economic events. This can be beneficial in volatile or rapidly changing markets, where passive strategies are likely to lag behind. The potential for higher returns with actively managed ETFs attracts investors who are willing to pay a little more for the expertise of specialised managers. These managers use strategies and market knowledge to select securities that they believe will outperform. At the same time, they offer the transparency and negotiability of an ordinary ETF. Investors may take or sell positions during the trading day. And they can always consult which shares or bonds the ETF invests in.

What are the disadvantages of actively managed ETFs?

While actively managed ETFs can offer advantages, there are also some drawbacks to consider. Actively managed ETFs may have (slightly) higher costs than passive ETFs, due to the active trading strategies and research required to analyse the selected stocks or bonds. As actively managed ETFs do not track an index, this may lead to deviations from market indices. This can be either positive and negative, depending on the manager’s skills. Actively managed ETFs also rely on the manager’s expertise to make effective decisions about when to buy and sell. This market timing can lead to significant gains, but it's a skill that is difficult to consistently execute well, bringing with it additional risks.

How many actively managed ETFs are there on the market?

At the end of March 2024, 87 actively managed ETFs were available on the European market. This is still relatively limited compared to the total range of ETFs on our continent: 3,036. However, the number of new actively managed ETFs is growing faster than the number of ordinary ETFs. According to Morningstar’s latest Global Fund Flow Report, the growth of actively managed ETFs worldwide exceeded that of traditional ETFs in 2023: +37% versus +8%.

How do you distinguish an actively managed ETF from an ordinary ETF?

Unfortunately, this is not a simple task. Although many actively managed ETFs have the word 'active' in their name, you can't always tell from the name of the tracker. The easiest way to determine whether an ETF is active or passive is to read the prospectus. Simply scanning the prospectus for the word 'active' may be sufficient. Actively managed ETFs also typically emphasise their investment strategy in the prospectus, such as finding 'undervalued shares' or using a bottom-up approach.

Investing in (actively managed) ETFs?

1. Log in to Keytradebank.be on your laptop or desktop 2. Click on Advanced at the top, next to Search 3. Tick Tracker 4. If necessary, search for the term active