Loading the player...

DEFINITION of 'Actively Managed ETF '

An actively managed ETF is a form of exchange-traded fund that has a manager or team making decisions on the underlying portfolio allocation, otherwise not adhering to 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 do not perfectly mirror the underlying index.

BREAKING DOWN 'Actively Managed ETF '

An actively managed ETF features many of the same benefits of a traditional exchange-traded fund like price, transparency, liquidly and tax efficient, but with a fund manager that can adapt the fund to changing market conditions. The combination of active management and an ETF provides investors with an innovative solution to asset management. For investors, there is enough to like about active ETFs; lower expense ratios than mutual funds, active participation of seasoned financial professionals, and the opportunity to gain benchmark-beating returns. 

It's not certain that an actively managed fund will under- or outperform a passive-ETF rival, though. Traditional ETFs can at least be counted on to follow an index faithfully, which allows investors to know the holdings and risk profile of the fund. This helps keep a diversified portfolio in line with expectations. Fund managers of an active ETF, however, have the freedom to trade outside of a benchmark index, which makes it more difficult for investors to anticipate the future makeup of the portfolio. This can work for investors when market conditions experience heavy volatility. An active manager can shift allocations away from underperforming positions to more appropriate sectors or asset classes. 

In late 2017, asset management giant Vanguard announced plans to roll out a catalog of active managed ETFs. The move is a sharp departure from the index-based strategy championed by founder John Bogle for multiple decades. 

Limitations of an Actively Managed ETF

Although actively managed ETFs share many of the same characteristics of traditional exchange-traded funds, they tend to come at a premium. Many of them have higher expense ratios than a traditional index ETF, which puts pressure on fund managers to consistently outperform or beat the market.

As with a mutual fund, the potential to outperform comes down to the underlying manager. Some will regularly beat expectations, but most research finds active management to underperform a passive strategy. Furthermore, actively managed ETFs tend to contradict basic investment principles like diversification. The typical fund manager shifts allocations according to market conditions, meaning the fund may be less diversified than a passive ETF.

  1. IPO ETF

    An IPO ETF is an exchange-traded ETF that invests in companies ...
  2. Active Index Fund

    Active index funds track an index fund with an additional layer ...
  3. Dividend ETF

    A dividend ETF is an exchange-traded fund designed to invest ...
  4. Index ETF

    Index ETFs are exchange-traded funds that seek to track a benchmark ...
  5. Active Investing

    Active investing refers to an investment strategy that involves ...
  6. Index Fund

    An index fund is a portfolio of stocks or bonds that is designed ...
Related Articles
  1. Investing

    Want ETFs But Hate To Buy And Hold? Try Active ETFs

    Choosing between passive and active ETFs depends on your beliefs about active management's value.
  2. Investing

    Active vs. Passive ETF Investing

    Active or passive ETF investing? Find out which one is for you.
  3. Investing

    What ETF Fund Managers Do

    Find out about the typical day in the life of an ETF portfolio manager, and learn about the primary job responsibilities of this career.
  4. Investing

    Using ETFs To Build A Cost-Effective Portfolio

    ETFs are a viable alternative to mutual funds, but before you invest, there are a few things you should know.
  5. Investing

    5 Reasons to Pick ETFs Over Mutual Funds

    Discover five reasons why average investors and sophisticated hedge funds choose ETFs instead of mutual funds to meet their investment goals.
  6. Investing

    Exchange-Traded Funds: Diversified and Affordable

    Exchange traded funds offer many benefits when compared to stocks and index mutual funds.
  7. Investing

    4 Ways to Evaluate ETFs Before Buying

    Learn four areas in which to evaluate an ETF investment to be sure that the investor has a clear understanding of the security being purchased.
  8. Investing

    4 Ways to Use ETFs in Your Portfolio

    To take full advantage of these vehicles, you need to know how they can fulfill certain strategies.
  9. Investing

    Mutual Fund Vs ETF: Which is Right For You?

    Want to invest but don't understand the difference between investment products? Here we explain ETFs vs. Mutual Funds and which is right for you.
  1. Who's in charge of managing exchange-traded funds?

    An exchange-traded fund (ETF) is a security that tracks an index but has the flexibility of trading like a stock. Just like ... Read Answer >>
  2. How are ETF fees deducted?

    Learn about exchange-traded funds and how their annual investment management fees are deducted from the securities you own. Read Answer >>
Trading Center