An exchange traded fund (ETF) is an investment vehicle constructed of individual securities, such as stocks or bonds, that trades on a stock exchange and is generally designed to track the performance of an index. ETFs have been available in the United States since 1993, and have exploded in popularity during the past decade. The original ETFs were designed to track major market indices, such as the S&P 500 or NASDAQ. However, over time, the ETF market has evolved, and now an investor can utilize ETFs that track individual market sectors, countries or commodities, to name a few options.
One of the most notable innovations in the ETF market came about in 2008 when the U.S. Securities and Exchange Commission approved the formation of the actively managed ETF. The primary difference between a traditional ETF and an actively managed ETF is that the actively managed option can be designed to follow a specific investment objective not represented by an existing index. For example, an investor might want to replicate the performance of an existing mutual fund.
From an investor’s perspective, one benefit to owning an actively managed ETF instead of the equivalent mutual fund is that the mutual fund’s performance can be negatively impacted by frequent redemptions from mutual fund investors. Since an ETF has a fixed number of shares outstanding that trade on a stock exchange, the buying and selling of the ETF shares does not impact the investment decisions of the ETF manager. Other benefits include lower expense ratios, greater tax efficiency, and increased transparency compared to the equivalent mutual fund.
Currently, actively managed ETFs are still in their infancy. Investors, however, can expect to see an increase in the number of offerings from various ETF providers in the future.
For more information, please contact Henssler Financial at 770-429-9166 or [email protected]