The Benefits of Active and Passive ETFs
The evolving spectrum of ETFs lets investors use active, strategic beta and passive strategies to achieve their goals.
ETFs let investors use active, strategic beta and passive strategies to achieve their goals.
Traditional index ETFs use passive investing to try to replicate the performance of an index.
The benefits of a passive strategy include…
- [Asset exposure] Investors receive easy access to certain asset classes and market sectors.
- [Cost efficiency] Index ETFs are generally lower-cost investments since they are not actively managed.
- [Transparency] Investors can easily see what stocks and/or bonds are held in the ETF.
With passive investing however, there’s no big outperformance reward because the goal is to replicate index performance, while active investing aims to outperform a benchmark.
The benefits of active investing include…
- [Professional investment management] Portfolio managers analyze companies and markets and decide what investments to buy and sell.
- [Potential for outperformance] Managers can use opportunistic investing to try to deliver higher risk-adjusted returns over the long term.
- [Risk management] The portfolio manager actively works to manage risks created by markets, liquidity, interest rates etc.
However, the active role of the portfolio managers means an active strategy has higher management fees.
More investors recognize that active, strategic beta and passive investment strategies can all help a portfolio. Whatever the combination, it’s the sum of all exposures that influences the desired outcome of the portfolio.
Ask your advisor how ETFs can help you achieve financial success.