Actively trying to beat the market
A NEW growth area is catching the attention of the investment world — active exchange-traded funds (ETFs).

Active ETFs are, like the name suggests, actively managed by a portfolio manager whose main goal is to beat market benchmarks through research and certain strategies.

Unlike passive or “normal” ETFs which tend to be long-term in nature, active ETFs are not subjected to a set of rules which in turn makes the managers’ task easier and the management of assets more effective.

According to ETFGI, an information provider on global ETFs, assets invested in ETFs increased exponentially from US$161bil (RM757.83bil) in 2019 to US$740bil last year — an almost 360% rise!

At the same time, global flows into active ETFs have also seen substantial growth, surpassing a whopping US$180bil in 2023.

However, active ETFs still make up a small part of the entire ETF market, registering only 8.5% of market share, based on latest available data.

Within Asia Pacific, active ETFs remain confined to smaller, more sophisticated circles.

Bloomberg recently reported that, of the US$348bil market for ETFs that invest in developing-nation assets, the holdings of only about 5% of funds are actively managed.

South Korea and Hong Kong were among the first to introduce it back in 2017 and 2019, while China had its first launch of active ETFs back in 2020. Japan joined the action last year.

Malaysia reportedly just jumped onto the bandwagon this year with the launch of a fund by a subsidiary of an investment bank that feeds into an actively managed ETF.

Nevertheless, experts reckon that the region is likely to see a high rate of growth in the coming years as the concept catches on and investors chase returns in the current dampened economic climate.

ETFGI estimates that the growth rate of assets under management (AUM) for actively managed ETFs within Asia Pacific was about 82% in 2023 on a year-on-year basis, making it the region with the fastest- growth of this investment type.

Why active and not passive

Lower costs, liquidity and the ability to diversify are some of the reasons why active ETFs are becoming popular. Active ETFs are said to have lower expense ratios than other managed mutual funds.

In terms of liquidity and diversification, they trade like stocks on a stock exchange, hence intra-day trading is possible.

Also, unlike their passive counterparts which mostly merely track a market index, these investments are more innovative in nature. Hence, their growing popularity.

Perhaps the biggest advantage of choosing to put one’s money into active ETFs is the likelihood of outperforming indexes, especially if one has an exceptionally clever portfolio manager.

Of course, this doesn’t mean that putting your money into active ETFs is the best strategy out there.

In fact, the biggest so-called advantage of pursuing this investment type is also the biggest risk. In the case of active ETFs, much hinges on the knowledge and skills of a portfolio manager.

If one intends to beat the performances of indexes, the portfolio manager must be more than average, to say the least!

There are drawbacks.

According to an article by Bankrate.com, while the goal of active ETFs is to outperform the overall market, that may not happen in reality.

“In fact, studies have shown that over time, the vast majority of active managers fail to outperform a passively managed fund.”

It also highlights another disadvantage of active ETFs, which is unlimited fund capacity.

“Unlike mutual funds, ETFs can’t close their doors to new investors, which can create challenges for funds with certain investment strategies. For example, a fund that focuses on small-cap companies could reach a size where it’s too big to buy small-cap stocks, upending its strategy.”

Active or passive, the basic rules of investing still apply.

Buying low, selling high and the perfect timing to do these — if such a thing actually exists.

This article first appeared in Star Biz7 weekly edition.
Star Biz7,Active ETFs,ETFs,investing,liquidity,diversification,assets under management,AUM
A NEW growth area is catching the attention of the investment world — active exchange-traded funds (ETFs).