While actively managed exchange-traded funds (ETFs) are getting interest in Asia, and more and more investors are eager to jump on the active ETF bandwagon, there are several misapprehensions about the instrument.
In a series of articles, we have set about debunking the myths and in this instalment, we address the concern: “Active ETFs are for short-term trading.”
ETFs are not just for day traders
Like stocks, ETFs can be easily traded throughout the day and liquidated as needed. While they can be a nimble instrument with the ability to adapt to market swings, they also possess all the attributes of a long-term investing tool.
Broadly, an ETF is a vehicle, and a variety of strategies can be placed in the ETF structure to leverage its benefits. Passive ETFs track the performance of an index while active ETFs rely on investment professionals to pursue a specific outcome — be it generating potential income, outperforming an index or reducing risk.
The ease of trading ETFs doesn’t mean they are for short-term trading. Active ETFs, can be used to construct sophisticated, broadly diversified portfolios and achieve long-term investing goals, and this can all be done at a relatively low cost.
Potential opportunities in active ETFs
Active ETFs are defined by active security selection, thanks to the backing of expert portfolio managers and a team of research analysts who undertake the fundamental analysis to determine the investment opportunities.
As a result, active ETFs can serve a variety of roles in a client portfolio.
- Their ability to mirror and outperform broad stock and bond indexes make them excellent “building blocks” for a core portfolio.
- ETFs targeting specific regions, sectors and strategies can be used in several ways to enhance diversification. For example, they can complement core holdings, fill gaps, realign an unbalanced portfolio or provide access to otherwise hard-to-reach markets.
- ETFs can be nimble instruments as they can be traded quickly and easily throughout the day. As such ETFs are effective vehicles for moving in and out of markets as new opportunities arise and risks change.
- Active ETFs can serve a variety of roles in a client portfolio such as gaining access to broad asset class exposures or expressing an investment preference to a particular factor, theme or strategy.
Actioning ETF investing
Active ETFs are taking the investment world by storm and have evolved to become an attractive addition to an investor’s toolkit. Active ETFs are also easy to access through brokers and the exchange, and they may provide low-cost opportunities to outperform indexes or to express an investment view.