What are active ETFs and should you invest in them?

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By Beansprout • 15 Jan 2024 • 0 min read

Learn more about active ETFs in our comprehensive guide. Find out how active ETFs work, their benefits, and how they differ from traditional or passive ETFs.

active exchange traded fund etf
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What happened?

Active ETFs are coming to Singapore!

It was reported that the first active exchange-traded fund in Singapore is set to list on Jan 31.

ETFs are investment funds that are listed and traded on a stock exchange. An ETF is made up of basket of securities that typically track an underlying index, allowing you to gain diversification in a single trade. 

ETF investing in Singapore has grown in popularity in recent years with the asset under management doubling to reach S$10 billion as of October 2023 from end-2019. 

However, if you have not heard of active ETFs, we will be sharing more about the advantages and disadvantages of active ETFs, as well as whether you should consider active ETFs for your portfolio.

Let us dive deeper to find out more about active ETFs! 

What are active ETFs?

Active ETFs are a type of ETF that are actively managed by a team of investment professionals. 

These fund managers would make decisions about which stocks, bonds, or other assets to include in the fund, with the objective of outperforming the market or a specific benchmark index through their investment choices.

Active ETFs can employ a wide range of investment strategies. This could include focusing on specific sectors or markets, and employing strategies like value or growth investing. 

Like other ETFs, active ETFs are traded on stock exchanges, meaning their prices can change throughout the trading day. 

As a reflection of its growing popularity, the aggregate fund size of active ETFs has grown to US$532 billion in 2023 from US$71 billion in 2018, according to data from Morningstar. 

The assets under management (AUM) of active ETFs in Asia Pacific have also recorded a 5-year annualised growth of 27%. 

active etf fund size asset under management

How are active ETFs different from passive ETFs?

Active ETFs are actively managed by investment professionals. Passive ETFs, on the other hand, simply track a specific market index, like the S&P 500, with an aim of replicating its performance.

We have summarized the other differences between active ETFs and passive ETFs in the table below. 

FeatureActive ETFPassive ETF
Management StyleActively managed by professionalsTracks a specific market index
Investment StrategyUses various strategies to outperform the marketFollows the index, no active trading strategies
CostsHigher expense ratios due to active managementLower fees due to less management intervention
Performance GoalsAims to beat the market or benchmark higher risksAims to match the performance of the index
Risk and ReturnPotential for higher returns but also higher risksMore predictable, mirrors the risk and return of the index
TransparencyMay have less frequent disclosure of holdingsTypically higher transparency in holdings

What are the advantages of active ETFs?

What are Active ETFs

#1 - Potential for Outperformance

The primary advantage of an active ETF is its potential to outperform the market or its benchmark index. Unlike passive ETFs that simply track an index, active ETFs are managed by professional fund managers who use their expertise, research, and market analysis to make investment decisions that could lead to higher returns.

#2 - Intra-day liquidity

Compared to unlisted funds, active ETFs offer investors intra-day liquidity and real-time pricing to capture potential market opportunities. Investors may also react faster to market events and able to enter or exit the market during local trading hours.

#3 - Risk Management

Active management allows for better risk control and management. Managers can actively steer away from sectors or assets they believe are overvalued or pose higher risks, potentially providing downside protection during market volatility.

What are the disadvantages of active ETFs?

#1 - Potentially Higher Costs Compared to passive ETFs

Active ETFs may have higher expense ratios compared to passive ETFs. The active management involves additional costs like research, analysis, and more frequent trading, which are passed on to the investor.

#2 - Risk of Underperformance

While the goal of active management is to outperform the market, there's a risk that the fund may not achieve this objective. The performance would depend on decisions made by the fund managers.

#3 - Lower Transparency

Some active ETFs may not disclose their holdings as frequently as passive ETFs, which can make it difficult for investors to understand exactly what they are invested in at any given time.

Nonetheless, there are several safeguards put in place to address the potential risk around transparency.

For instance, SGX RegCo has made it a requirement for fund managers to:

  • Publish indicative net asset value throughout the trading day
  • Disclose net asset value daily on the issuer’s website
  • Publish fund performance and portfolio holdings at least monthly.

What should we consider when investing in an active ETF?

There are several factors to consider when selecting an active ETF, including the following:

  • Fund Investment Objective and Holdings: Understand the fund's investment objective and make sure it aligns with your own investment goals. Examine the fund's portfolio holdings to understand where your money will be invested. 
  • Fund Manager's Track Record: Evaluate the track record of the fund managers by their performance history, experience, and how they have managed the fund through market cycles
  • Expense Ratio and Fees: Consider the cost of the ETF, including the expense ratio and any additional fees. Higher fees can eat into your returns over time, so ensure that the potential for higher returns justifies the higher cost.
  • Performance Relative to Benchmarks: Compare the ETF’s performance to relevant benchmarks and peer funds over different time periods. While past performance is not indicative of future results, it can provide some insight into how the fund performs relative to its peers and the market.
  • Trading Volume and Liquidity: Look at the trading volume of the ETF, as a higher trading volume generally makes it easier to buy and sell the ETF without impacting the price too much.

How to gain access to active ETFs?

With the listing of active ETFs on the SGX, you will now have a wider range of active ETFs that can be accessed through your stock trading platform. 

In fact, Singapore’s first actively managed ETF – the Lion-Nomura Japan Active ETF (AI Powered) – is expected to be listed on 31 January 2024. 

Jointly launched by Lion Global Investors and Nomura Asset Management group, the ETF offers investors exposure to an actively managed portfolio of between 50 and 100 listed Japanese companies with the potential for long-term capital growth.

More information can be found on the issuer’s website.

What would Beansprout do?

As a new product in the Singapore market, active ETFs offer a middle ground between the hands-off approach of passive ETFs and the hands-on strategy of traditional actively managed funds.

To choose the right ETF to invest in, we can start by understanding the different types of ETFS and how they can match our investment objectives.

If you prefer a low-cost and simple investment option, then it might be worth considering a passive ETF. 

If you would like the potential for higher returns compared to the benchmark index and active risk management, then it might be worth considering an active ETF.

Click here to access the latest reports related to ETFs listed in Singapore.

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