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.
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:
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
Excludes new funds launched in same year as capital gains distribution measurement.
Source: FI Market & Competitive Intelligence, Morningstar Direct.
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
3. Advisor-sold market includes RIA, Broker-Dealer, and Wirehouse channels. Source: FI Market & Competitive Intelligence, Simfund, Broadridge GMI Funds.
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.
After 30 years, with an assumed 6% annual growth rate, the power of lower cost and compounding returns grows the ETF investment to $484,416 while the mutual fund reaches only $402,366.
Past performance is no guarantee of future results.
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.
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.
Explore our latest research & insights
1. The 2023 Trends in Investing Survey, Financial Planning Association, June 2023.
2. FI Market and Competitive Intelligence, Morningstar Direct, July 2023
Diversification does not ensure a profit or guarantee against a loss.
Semi-Transparent Active Equity ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. These ETFs will not. This may create additional risks for your investment. For example: You may have to pay more money to trade the ETF's shares. These ETFs will provide less information to traders, who tend to charge more for trades when they have less information. The price you pay to buy ETF shares on an exchange may not match the value of the ETF's portfolio. The same is true when you sell shares. These price differences may be greater for these ETFs compared to other ETFs because they provide less information to traders. These additional risks may be even greater in bad or uncertain market conditions. The ETFs will publish on their website each day a "Tracking Basket" designed to help trading in shares of the ETFs. While the Tracking Basket includes some of the ETF's holdings, it is not the ETF's actual portfolio. The differences between these ETFs and other ETFs may also have advantages. By keeping certain information about the ETFs secret, these ETFs may face less risk that other traders can predict or copy their investment strategy. This may improve the ETF's performance. If other traders are able to copy or predict the ETF's investment strategy, however, this may hurt the ETF's performance.
Because shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor may incur the cost of the spread between the price at which a dealer will buy shares and the price at which a dealer will sell shares.
Additional information for Semi-Transparent Active Equity ETFs: The objective of the actively managed ETF Tracking Basket is to construct a portfolio of stocks and representative index ETFs that tracks the daily performance of an actively managed ETF without exposing current holdings, trading activities, or internal equity research. The Tracking Basket is designed to conceal any nonpublic information about the underlying portfolio and only uses the fund's latest publicly disclosed holdings, representative ETFs, and the publicly known daily performance in its construction. You can gain access to the Tracking Basket and the Tracking Basket Weight overlap on Fidelity.com or i.fidelity.com. Although the Tracking Basket is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the Fund; ETFs trading on the basis of a published Tracking Basket may trade at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and therefore may cost investors more to trade, and although the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Tracking Basket to identify a fund's trading strategy, which, if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders. Because shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor may incur the cost of the spread between the price at which a dealer will buy shares and the price at which a dealer will sell shares.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.