The Investment Case for Active ETFs

Exchange-traded funds (ETFs) debuted in the 1990s as the next iteration of pooled investment vehicles. Initially structured as index-tracking passive investments, their benefits include low relative costs, tax efficiency, and the ability to trade intraday on an exchange.

Investors have embraced this structure, as the global ETF market zoomed to an estimated $11.7 trillion in AUM* as of early 2024. Part of this explosive growth reflects the evolution of the types of strategies now offered in ETF wrappers. The past 20 years have seen substantial growth in “smart-beta” or “strategic-beta” strategies that track an index based on alternative weighting methodologies—such as momentum, value or low-volatility—that isolate specific investment characteristics aimed at outperforming a traditional benchmark index.

Smart-beta ETFs seemed to bridge the gap between active and passive investing.

The next stage of the ETF evolution occurred when active managers began rolling out their strategies in ETF vehicles. This continues today across fixed income, equity and alternative asset classes.

Why Active?

The actively managed ETF trend makes sense for investors who want to complement their passive investments with actively managed products that offer  the liquidity, low-cost potential, transparency, and tax-efficiencies inherent in the ETF structure.

Inefficiencies can occur within both fixed-income and equity markets, resulting in mispricings regarding future earnings or perceived risk. Skilled active managers can exploit these inefficiencies by selecting mispriced securities to build portfolios that differ from their benchmarks. This is how professional investors generate alpha, or excess returns against the benchmark.

Transparency of holdings is another benefit. With mutual funds there is often a lag before investors know what securities are held in the portfolio, but with ETFs that information is available to investors on a daily basis.

And like with all ETFs, the underlying in-kind share creation and redemption process can help minimize capital gains because when investors pull money from an ETF they sell their shares on the exchange rather than from the fund itself. As a result, the ETFs do not have to sell underlying positions to generate cash for redemptions, potentially avoiding gains from those transactions that they would otherwise have to pass on to investors as in a traditional mutual fund structure.

Total Picture

Investors should expect to pay more for active ETF strategies versus passive strategies. Fees should be appropriate to the manager’s process for the asset class, and for the expected excess return potential. 

While active ETFs offer various benefits, mutual funds can and will continue to play a very important role in investor portfolios, including tax-exempt accounts such as 401(k) and 529 plans where ETFs’ tax efficiency becomes moot. Nevertheless, in our opinion the proliferation of actively managed ETFs is a good thing for investors.

The VictoryShares suite of 28 Nasdaq-listed ETFs comprise active and passive strategies across both equities and fixed income, offering investors many portfolio diversification opportunities. ETF investment solution types include risk-weighting, dividend-oriented strategies, factor-based approaches and defensive equity strategies. For more information on this lineup visit www.victoryshares.com.
 

*According to investment research from Zack’s and published at Nasdaq.com.
https://www.nasdaq.com/articles/global-etf-aum-hits-$11.7-trillion:-whats-driving-the-surge

Beta is a statistic that measures the expected increase or decrease of an individual stock price in proportion to movements of the stock market as a whole, usually the S&P 500 Index.

Disclaimer
Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc.  nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Carefully consider a fund's investment objectives, risks, charges and expenses before investing. This and other information can be found in the fund's prospectus or, if available, the summary prospectus, which may be obtained by visiting the Mutual Fund and ETF prospectus pages at vcm.com. Read the prospectus carefully before investing.

All investments carry a certain degree of risk including the possible loss of principal, and an investment should be made with an understanding of the risks involved with owning a particular security or asset class. Transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. Certain traditional mutual funds can also be tax efficient.

VictoryShares ETFs are distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc., the Fund's advisor.

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