The shift from passive to active ETFs reflects the changing landscape of the investment world, with investors seeking more control and customisation in their portfolios.
ETFs gained popularity for having lower fees than actively-managed funds while also being easier to trade via stock exchanges.
An ETF can also be an easy way for beginner investors to start investing in the stock market, as they provide diversification, low cost, accessibility, and transparency.
According to Padua Solutions head of research Ben Walsh, there are approximately 72 active ETFs within the ASX & CBOE universe, with 42 per cent of these listing since 2021.
“Since December 2022, nine active ETFs have been added to the ASX, [but] adviser usage of CBOE assets is limited due to many platforms not supporting activity on the CBOE exchange (six active ETFs),” he tells Professional Planner.
Passive ETFs aim to track the performance of a specific index or market benchmark, such as the S&P 500, by holding the same stocks in the same proportions as the benchmark. On the other hand, active ETFs are managed by professional fund managers who make investment decisions based on their own research and analysis, rather than simply tracking a benchmark.
This shift is driven by investors looking for more personalised investment options that cater to their specific financial goals and risk tolerance.
Active ETFs offer the potential for higher returns and better portfolio diversification, as fund managers can adjust the fund’s holdings based on market conditions and other factors.
Additionally, active ETFs often provide more transparency than traditional, actively managed mutual funds, as they are required to disclose their holdings daily.
“Based on our data, active ETF usage within the advice industry is limited to date with some positioning within core-satellite strategies,” Walsh says.
“We see more utilisation within the hedge fund category particularly for currency management.”
Padua anticipates this will change dramatically over the next couple of years as more active options become available.
“Our observation is based on the experiences arising from the UK and US markets over the last few years,” Walsh says.
Padua, however, is concerned Australia lacks the regulation to support fee disclosure for these new products. The implied costs of ownership of assets are not disclosed under the updated RG97.
“This oversight will make these investment options appear cheaper to their unlisted cousins,” Walsh says.
“That said, ETFs also have significant advantages for clients and advisers alike.”
Whether shifting from passive to active ETFs is good depends on individual investors’ goals and risk tolerance. Some investors prefer the simplicity and lower cost of passive ETFs. Others believe the additional management expertise offered by active ETFs is worth the higher fees.
It is important for investors to carefully consider their investment goals, risk tolerance, and overall financial situation before deciding on whether to invest in passive or active ETFs.
Active ETFs: a positive development for the advice industry
For Canaccord Genuity Wealth Management adviser Tom Collinson, passive ETFs have played an important role in client portfolios for years.
“We use them in asset classes where markets are most efficient and where sustainable outperformance of benchmarks is difficult,” Collinson says.
Canaccord also uses passive ETFs to express overweight or underweight exposures to different asset classes, enabling them to add value through active asset allocation over the cycle.
Having said this, the firm believes in the benefits of active management if used correctly.
“The advent of active ETFs is unequivocally a positive development for the advice industry because it makes actively-managed investment strategies even more accessible,” Collinson says.
He added that holding active strategies via a CHESS-sponsored HIN (Holding Identification Number) is also a key advantage.
“Meaning investors who enjoyed the simplicity of holding all their investments on a single broking account can extend their investment universe to include more actively managed strategies,” Collinson.