An Exchange Trade Fund, or ETF, is a package of securities that is bought or sold through a brokerage firm. It’s offered to help lower your risk and exposure while diversifying your portfolios. Active ETFs are great when developing and launching a new strategy and have lower expense ratios than mutual funds. However, it has its downfalls as well. Let’s look at both sides of the active ETF coin. 

The Benefits of Active ETFs

The asset management industry has been taking a liking to active ETFs recently. The share of actively managed ETFs in the US market reached 8.5% by March 2024, as reported by Morningstar.

Active ETFs had higher growth rates than traditional index funds in 2023. Actively managed equity ETFs alone grew 48% organically last year. This year it grew 37% versus last year’s growth of only 8%. Morningstar also calculated that, in each year since 2018, active ETFs have had net flows of at least $25bn and experienced an organic growth rate of over 30% in the US. 

2024 is all about active ETFs. In 2019, only 350 active ETFs existed. In 2023, it skyrocketed to nearly 1,400. Last year, there were 530 new active ETFs launched, more than in any other year over the preceding 10 years, accounting for 73% of new ETF launches. 

Cost is another factor to consider. ETFs’ fee structure doesn’t charge sales loads or distribution fees, so the average active ETF fee is 36% cheaper than the average active mutual fund fee, according to a recent Morningstar report. 

The Downfalls of Active ETFs

ETFs have their downfalls too. One thing to note is that they must disclose their holdings daily, whereas mutual funds only do it quarterly. Mutual funds provide managers with a more adjustable strategy as funds increase, by rejecting new investors while protecting their performance edge. ETFs cannot prevent new investors from coming in like mutual funds.

One major disadvantage of ETFs is that portfolio managers are unable to reject new investments. When mutual funds managers become concerned with capacity, they can close their funds. ETFs aren’t so lucky. Their managers must invest every dollar that comes in, no matter what their strategy is. This leads to a watered-down portfolio.

To summarize, active ETFs demonstrate exceptional performance in specific market conditions, yet mutual funds continue to hold relevance in the current landscape. We would love to know your experience with comparing ETFs and mutual funds!

Which do you ultimately prefer and why? Let us know below!