ETFs Explained #4: Why active management in ETFs matter?

Active ETFs are designed in a way that they can go beyond the limitations of market-cap indices that passive ETFs track. By simply tracking an index, passive ETF will likely invest in the bigger companies in an equity index and the bigger debt issuers in a bond index as they constitute a higher percentage of the index.
On the contrary, active ETFs present a greater variety of investment options, in the form of strategies reflecting specific company level research, and investment flexibility to take advantage of temporary mispricing in the market. Active ETF managers have the ability to access the entire equity and bond markets, opening up the potential for capturing opportunities to manage risk and add alpha.

Active managers are not beholden to index weights or index rebalancing. They can instead undertake their own analysis to pick investments. In addition, they can be nimble to help manage the portfolio. Managers of active ETFs can position a portfolio in response to the business cycle and reallocate investments to insulate their strategies from shocks during periods of volatility and take advantage of opportunities to boost returns.

Active management of ETFs is becoming an effective and essential modern portfolio construction technique. With the growth in the number of such ETFs, investors now have the option to select active ETFs that reflect their market conviction, and tap active managers who have access to sophisticated resources and deep research insights. The nimbleness and flexibility add to the allure of the instrument and may make it an all-weather portfolio tool in an investor's portfolio.