The Pros and Cons of an Actively Managed ETF

The actively managed ETF is a type of investment that combines aspects of a traditional mutual fund and an exchange-traded fund. This is a fund that you can trade on the exchanges just like a stock, but it represents a basket of underlying assets just like a mutual fund. While most ETFs are passively managed, some of them utilize active management strategies. Here are some of the pros and cons of investing in an actively managed ETF.

Additional Returns

One of the biggest advantages of investing in an actively managed ETF is that you can sometimes realize additional gains. With traditional forms of ETFs, the fund managers do not actively trade the underlying assets. Instead, an ETF is generally designed to track a particular financial index. While this can provide you with steady returns, you may not be able to do as well as you would like. By utilizing active management techniques, the fund managers can sometimes bring in additional returns for the investors. You might be able to beat the return that you get with a passive fund.


An actively managed ETF is very similar to a mutual fund. The fund managers look for opportunities to buy and sell securities for the basket. However, where actively managed ETFs are superior is in the area of liquidity. Investors can buy and sell shares of this type of ETF anytime that the stock market is open. By comparison, if you are investing in mutual funds, you have to wait until the end of the trading day to buy or sell your shares. If something happens throughout the day, you cannot quickly liquidate your shares or buy more if you need to with a mutual fund. There are always plenty of opportunities to trade ETFs anytime that you want to.

Opportunity for Mistakes

Anytime that you introduce active management techniques into a particular fund, you are opening the door for mistakes to be made. With active management, you have to rely on a fund manager to choose investments that will perform well. Considering that it is impossible always to choose the best investments, fund managers could potentially choose the wrong securities for the fund. This could not only limit the returns, but it could cause losses in some cases. If you are interested in the additional returns that come with this strategy, you should also be aware of the additional risk that comes with it.

Increased Costs

One of the big selling features of most ETFs is that they are cheaper than mutual funds. Since they are passively managed, you do not have to pay the expense ratios that you are used to with mutual funds. However, when you invest in an actively managed ETF, you have to deal with the increased management costs. Since the fund managers are working a lot more and making tough decisions, they have to be compensated for this work. In some cases, the costs can outweigh the benefits.

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