FAQs
Actively Managed ETFs
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1. Are the first actively managed ETFs that have been introduced attractive to investors?
Keep in mind that one of the requirements of these initial efforts at active management is that they must reveal any changes in their portfolio at the end of the day on which the changes were made. These funds can operate because the convention in mutual fund pricing has long been that the fund's daily net asset value is calculated from the start of day portfolio and any transactions made over the course of the day do not affect the net asset value calculation. Transactions made during the day, however, will effect the start of the day portfolio on the following day and may create a small disconnect in the hedging plans of market makers. Setting that disconnect aside, a constraint on the ability of the manager to spread trading to make a portfolio change over time encourages the fund manager to compress trading into a short interval rather than attempt to minimize transaction costs inside the fund. As a practical matter, this process works much better for large-cap and mega-cap funds than for small-cap funds. It has also been adopted for a variety of fixed income funds. While these funds have not enjoyed particularly strong reception from investors and advisors, a few of them have reasonable long-term prospects; but like full featured actively-managed ETFs which are not yet available, these limited actively-managed ETFs will benefit substantially from net asset value based trading. In fact, NAV-based trading is almost essential for these funds to compete with major benchmark index ETFs, whether the portfolio holds equities or fixed income securities.
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2. What kind of portfolios will eventually be available in actively managed ETFs?
Given a favorable reception by regulators, actively managed ETFs using NAV-based trading should eventually be competing with all actively managed mutual funds and delivering superior performance for investors.
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