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DEFINITION of 'Actively Managed ETF '

An exchange-traded fund that has a manager or team making decisions on the underlying portfolio allocation or otherwise not following a passive investment strategy. An actively managed ETF will have a benchmark index, but managers may change sector allocations, market-time trades or deviate from the index as they see fit. This produces investment returns that will not perfectly mirror the underlying index.

BREAKING DOWN 'Actively Managed ETF '

There's no hard-and-fast rule as to whether an actively managed fund will under- or outperform a passive-ETF rival. Passive ETFs can at least be counted on to follow their indexes faithfully, which allows investors to know up front the holdings and risk profile of the fund. This helps to keep a diversified portfolio in line with expectations.

Actively managed funds, however, have the freedom to trade outside of their benchmark indexes, which makes it more difficult for investors to anticipate the future makeup of the portfolio.

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