Active Exchange Traded Funds explained
Active Exchange Traded Funds (Active ETFs) share many of the benefits of passively managed ETFs.
They have become an important consideration for self-managed super fund (SMSF) investors, and it’s worthwhile for trustees to understand how Active ETFs work and the value they potentially add to an investment portfolio.
As the name suggests, Active ETFs are traded on securities exchanges, so they are bought and sold like any share on the Australian Securities Exchange (ASX).
They have no minimum investment and there’s no need to fill out extensive paperwork to invest in them, as would be the case with managed funds that are not listed on share markets.
Investors can also check the price of their Active ETFs as they change throughout the day. This is unlike managed funds, whose units are usually valued at the end of the trading day.
Active ETFs are open-ended and act as their own market maker providing live bids/offers and creating new units. As they publish a regularly updated indicative net asset value (iNAV) investors are able to understand a “fair value” of the fund throughout the trading day. Each Active ETF’s iNAV is updated every 15 seconds.
As Ilan Israelstam, head of strategy, BetaShares explains, the main difference between active and passive ETFs is the way the underlying assets are managed.
“The aim of passively managed ETFs is generally to track a particular benchmark index, say the Nasdaq-100, or an asset class, say the spot price of gold,” says Israelstam.
On the other hand, Active ETFs are pro-actively managed to outperform a specific objective, rather than tracking an index.
“In this respect the performance objective of active ETFs is similar to traditional unlisted managed funds,” he adds.
Risk and reward trade off
The primary advantage of Active ETFs is the structure itself.
The advent of Active ETFs means investors are now able to access high-quality, actively managed investment strategies as simply as buying a share on the ASX.
But there are always risks in investment markets and this is also true of Active ETFs. It’s important for investors to understand what these are.
“Active ETFs’ risks are inherent in the underlying investment strategy, rather than risks with the ETF structure,” Israelstam explains.
These include risks associated with the asset class or sector the investment strategy is covering, as well as the performance risk associated with the manager’s investment strategy.
Place in a portfolio
The place for Active ETFs in an SMSF will depend on its underlying investment strategy.
That said, because Active ETFs are so easy to trade, they have particular appeal for self-directed investors who want to be involved in buying and selling their investments.
SMSFs were some of the earliest adopters of ETFs generally, but this has especially been the case with Active ETFs.
“Active ETFs are easy to trade in and out of and can be used by SMSF investors to implement a variety of investment strategies,” Israelstam says.
“Many investors are choosing to complement Active ETFs with their existing passive ETF holdings as a way to potentially generate greater levels of return in their portfolios,” he adds.
AMP Capital has joined forces with BetaShares to bring investors three Active ETFs.
1. Global Infrastructure Securities Fund (Managed Fund) ASX Code: GLIN
This fund gives investors the opportunity to benefit from the expected long-term global growth in infrastructure, and the return potential associated with infrastructure assets.
2. Global Property Securities Funds (Managed Fund) ASX Code: RENT
This offers access to a diversified portfolio of property securities and real estate investment trusts (REITs) listed on equity markets around the world.
3. Dynamic Markets Fund (Hedge Fund) ASX Code: DMKT
The fund adopts AMP Capital’s dynamic asset allocation investment approach that aims to negotiate the ups and downs of the market cycle.
You can learn more about AMP Capital’s three Active ETFs here
Active ETFs are an important new way for SMSF investors to access areas of the investment markets that have typically been hard to reach for investors. Learn more about Active ETFs in general here
For SMSF trustees, it’s an idea to consider whether these strategies have the potential to help members achieve their long-term investment goals.