Three reasons investors are choosing active ETFs for their portfolios

Three reasons investors are choosing active ETFs for their portfolios

Three reasons investors are choosing active ETFs for their portfolios

4 minute read

February 2025

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We believe there are three benefits to Active ETFs: Active management, convenience and tax efficiency.

Exchange Traded Funds (ETFs) surpassed more than $1 trillion in asset flows in 2024, according to Morningstar. Importantly, despite representing just 6% of the ETF market at the start of the year, active ETFs accounted for 26% (or$295 billion) of those flows.

This is not an overnight phenomenon. Active ETFs flows have been climbing at a staggering 39% annual growth rate since 2019.

Why the accelerating interest? We believe there are three benefits to Active ETFs that are driving investor adoption.

Active ETFs flows have been climbing at a staggering 39% annual growth rate since 2019.

Active ETFs offer the potential for higher returns compared to funds that simply track an index. This is because they are actively managed by professional fund managers who make investment decisions based on research and market analysis. Further, investors seem to be increasingly realizing that less efficient asset classes like fixed income, sector-focused, small-cap or emerging markets lend themselves to better returns through active management.

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Active ETFs provide intraday trading, no minimum investment requirements, transparency and low costs. Mutual funds trade just once a day at the end of each trading day and are priced at the end of day as well. ETFs, by comparison, trade intraday and are priced at real-time market prices. This makes them accessible and easy to trade for investors of all sizes. Transparent ETFs also disclose their holdings daily. Mutual funds disclose holdings just monthly and quarterly. And active ETFs, on average, have lower expense ratios than mutual funds.

Active ETFs are structured in a way that allows them to distribute fewer capital gains to shareholders compared to mutual funds, enhancing after-tax returns. ETFs accomplish this through in-kind transactions, where they exchange underlying portfolio holdings for ETF shares without creating a taxable event. In 2023, for instance, only 6% of active ETFs had a capital gains distribution compared to 32% of mutual funds, according to Morningstar.

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