Active ETFs Appear Attractive in These Volatile Times
When markets are up and down, it’s hard to stay calm and find opportunities. But active ETFs could be the solution as they’re getting increasingly popular.
In stock trading, volatility is something everyone fears. But the success of trading is to identify the opportunities even in adverse situations. Not every time do they come knocking on the door. So could this be the right time for ETF trading?
Is This the Right Time for Active ETFs?
The markets may be up and down, but they are certainly benefiting the exchange traded funds (ETFs). Investopedia analyst Matthew Johnston observes that active funds are getting increasingly popular despite passive ones still dominating much of the industry. Johnston points out that last year the investor cash flow entering the active ETFs containing stocks and bonds reached record levels. This was the first time that index-tracking ETF inflows actually slowed in more than 5 years.
According to an article in The Wall Street Journal, what’s making active ETFs attractive is the human element involved in their management. To quote figures from the Wall Street Journal, there was $27.5 billion that was channelled towards active ETFs last year. The active-passive hybrid strategic beta funds received an inflow of $74 billion.
What Makes Active ETFs Attractive
In usual circumstances investors are deterred by the high fees that actively managed funds come with. But these aren’t usual circumstances, since market volatility has soared through the past year. In these circumstances, investors don’t mind shelling the extra cash since these investments would be managed professionally. That’s the certainty that gives them solace in uncertain times.
ETFs vs. Mutual Funds
Unlike mutual funds, ETFs have usually been perceived as passive investment options. These keep track of a particular market sector or index. But now ETFs are being considered as active investment vehicles too. Active ETFs may be more expensive than passive ones, but they are still cheaper than active mutual funds. This blend of cheapness when compared to active mutual funds, and the volatility of the markets, has made active ETFs quite attractive. As per Brown Brothers Harriman surveys, active ETFs now make up a broader group in terms of preferred investment list toppers for advisers and investors in the US. There were more active ETFs that were added into the market than any other category additions.
The active ETFs have also outperformed passive ETFs. Johnston quotes Yahoo Finance as reporting that by mid-December 2018, active ETFs returned negative 3.74% while passive ETFs returned negative 6.5%. Looking to the future, it isn’t easy to figure whether active ETFs will keep outperforming. Johnston states that active ETF managers might need to outperform for over a year to make a case for these investment vehicles.
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