Active ETFs currently appear to be developing into a new trend in fund investment. They promise high returns at relatively low costs. But what are active exchange trade funds? And what are their advantages and disadvantages?
Active ETFs: That sounds somewhat contradictory at first. This is because exchange trade funds (ETFs) are actually passive exchange-traded index funds. The aim is to replicate a specific share index such as the DAX or the MSCI World as closely as possible in order to achieve a similar return. However, active ETFs are somewhat different.
What are active ETFs?
Like passive exchange trade funds, active ETFs also have a specific share index as a benchmark. However, they deliberately deviate from this so-called benchmark. In addition, it is not a computer that decides on the ETF portfolio, but a fund manager.
This can make active and targeted changes to the composition of the fund. Active ETFs can therefore sometimes differ significantly from their benchmark index. The main aim is to achieve a so-called excess return, in the past a return that is higher than that of the benchmark index.
Active ETFs vs. active funds: the difference
Active ETFs are similar to active investment funds, as they are managed by a fund manager. Like traditional ETFs, they are traded on the stock exchange. This is not necessarily the case with active investment funds. Active trade exchange funds therefore combine the advantages of conventional ETFs with the active approach of investment funds.
Compared to investment funds, the costs are also significantly lower and the returns are ideally higher. This should enable newcomers in particular to enter the world of active investment trading. This so-called outperformance makes ETFs extremely attractive for investors. However, the key question is whether and how often this is successful.
Active exchange trade funds: advantages and disadvantages
According to a study by the rating agency Scope, eight out of 37 active ETFs examined achieved an excess return over a period of three years. This means that it is certainly possible to achieve higher returns than with passive ETFs. However, not even a quarter of the funds succeed in doing so.
ETFs generally offer the opportunity to invest relatively easily in a broad-based stock market index. This is especially true for inexperienced investors who want to participate in the stock market and benefit from good returns. However, active ETFs initially contradict this somewhat, as they are managed by an active fund manager in order to achieve an excess return.
Nevertheless, they are traded on the stock exchange and are comparatively inexpensive. They combine the advantages of active investment funds and exchange-traded index funds. Nevertheless, caution is advised, as active ETFs also harbor risks. Excess returns are by no means certain. On the contrary: in theory, the return can even be lower than with passive ETFs.
In terms of costs, active exchange trade funds are higher than passive ETFs but lower than active investment funds. Although they certainly have potential, it is not easy to find a suitable active ETF. This is because there are only a few of them to date, most of which have not been active long enough to be assessed in the long term.