The case for active ETFs: The power of active management and the flexibility of an ETF

With benefits spanning active management to tax efficiency, now's the time to take a fresh look at active ETFs and Fidelity's robust active ETF lineup.

3 reasons to consider active ETFs

Right now, more than 60% of advisors plan to increase their usage of ETFs, including nearly 50% who plan to do so with active ETFs.1 With active ETFs, you can invest based on your market views while managing capital gains, get exposure to active managers who don’t merely follow an index, and trade with more flexibility during periods of volatility. A modern portfolio construction technique, active ETFs offer advantages to your client portfolios, including:

Tax efficiency

The structure of ETFs offers opportunities for tax-efficiency and tax loss harvesting—two critical strategies that can help you better manage your clients’ portfolios.

Opportunity for enhanced excess returns

Active ETF managers can act on opportunities to generate excess returns, since they are not bound to an index in the way that passive ETFs are. This potential for alpha is critical for client portfolios, especially during times of high volatility.

Holdings transparency & intraday trading

Traditional mutual funds trade once per day after the markets close. Active ETFs are bought and sold during the day while markets are open, offering you intraday trading capabilities for easier portfolio management. And when it comes to cost, portfolio expenses are generally lower for active ETFs relative to their comparable actively managed mutual funds.

The tax efficiency of active ETFs

Despite the weak markets of 2022, 64% of active equity mutual funds paid capital gains; for active equity ETFs during the same period, that number was just 12%. As this chart also illustrates, comparable differences were found in taxable bond vehicles that year as well.

Fidelity active ETFs are in line with Morningstar's findings:2

  • 8 out of 9 Fidelity active equity ETFs in 2021 and 7 out of 9 in 2022 distributed zero capital gains
  • Those that did averaged just $0.58 per share in 2021 and $0.13 per share in 2022
  • No Fidelity active bond ETFs distributed cap gains

Active ETFs offer efficiency when managing gains

Frequency of Distributions: % of Active Funds Distributing Any Capital Gains to Shareholders

Active ETFs may help clients achieve higher returns

Active ETFs aim to outperform their benchmarks by capitalizing on the active management skills of their managers. Unlike passive ETFs, which are tied to an index, active ETF managers can analyze the markets and trade proactively—creating the potential for enhanced excess returns.

Growth in the advisor-sold market has increased steadily over the last 5 years. In fact, on average, active ETFs’ 5-year compound annual growth rate (CAGR) of 44% is almost 3 times the rate for passive ETFs—and 11 times higher than active mutual funds.

More investors are choosing active ETFs

Lower cost & trading flexibility

Intraday management of a portfolio is easy with active ETFs, thanks to the nearly instantaneous trading of ETF shares. You can efficiently move clients’ money between specific asset classes, such as stocks, bonds, or commodities—allowing you to react to market changes as they happen.

And when it comes to cost, your clients may be thinking that active ETFs are too expensive. In fact, active ETFs have a lower expense ratio compared to actively managed mutual funds. Coupled with the power of compounding, portfolio returns have the potential for significant growth over time.

Lower cost can lead to higher returns

Comparing growth of $100,000 with different expense ratios.


What active ETFs can do for your portfolios

The traditional benefits of ETFs being cheaper, more tax efficient, and having daily liquidity have always helped make ETFs more appealing to financial advisors. The growing appeal of ETFs has been boosted by the increased access to actively managed ETFs, which are now attracting advisors who want active strategies.

Paul Ma VP, Lead Portfolio Strategist , Fidelity Investments

Want to know more?

Get the details on Fidelity's active ETF lineup and let us know if you'd like to schedule a meeting to discuss building better portfolios with active ETFs.

Fidelity core active equity ETFs

Fidelity active equity ETFs combine our industry-leading approach to security selection, research, and technology with our commitment to helping you support your clients’ financial journeys.