Five Things to Know About Active ETFs

Active exchange-traded funds (ETFs) have surged in popularity over the past few years, reshaping the investment landscape with their unique approach and benefits. Since the beginning of 2019, actively managed ETFs’ share of the U.S. ETF market has more than quadrupled — from just over 2.0% to 8.5% as of March 31, 2024.1

Considering the additional opportunities active ETFs provide investors, they could be a good option to include in your portfolio strategies. To help you determine the right approach, here are five important factors to know about this investment type.

1. Active ETFs’ remarkable growth can be attributed to several factors
   The SEC passed the “ETF Rule” in 2019, which made it easier to bring ETFs to market and gave active managers the flexibility to utilize them. Plus, ETFs are generally more cost-efficient than mutual funds, as their expense ratios only cover the cost of manufacture, and exclude fees for marketing, distribution, and recordkeeping. As a result, they can be an attractive option for many investors.
2. Active ETFs are actively managed and reach for higher returns.
   Unlike passive ETFs, which track a benchmark, active ETFs are managed by professional portfolio managers who actively make investment decisions in an attempt to outperform a benchmark. This active management can potentially lead to higher returns, especially in markets where the manager's expertise can capitalize on price discrepancies and trends.
3. Active ETFs can be a good fit for clients who want to reach for outperformance but can take on some additional risk.
   Active ETFs can be suitable for clients who are comfortable with a higher risk-reward tolerance. Clients with a longer investment horizon may benefit from active ETFs, as they allow managers to capitalize on market cycles and trends. Lastly, those who prefer staying updated with market movements and are interested in a hands-on investment approach may find active ETFs appealing.
4. Active ETFs can offer investors diverse and interesting exposure. Active ETFs are not limited to traditional asset classes or geographic boundaries. They encompass a wide range of strategies, including factor investing, thematic investing, and sector-specific strategies, providing a broad spectrum of choices to fit various client profiles and investment goals.
5. The primary benefits of active ETFs include flexibility and tax efficiency, on top of potential outperformance.
   Active ETFs are attractive to investors for several reasons, including:

• Flexibility: Managers of active ETFs can quickly adapt to changing market conditions, adjust holdings, and exploit market inefficiencies.
• Tax Efficiency Despite their active management, this type of ETF maintains a level of tax efficiency similar to their passive counterparts. This is due to the ETF structure that allows for the creation and redemption of shares in-kind, helping to avoid capital gains distributions that can trigger tax events.
• Transparency and Liquidity: Like all ETFs, active ETFs provide the benefit of daily liquidity and transparency, allowing clients to see the underlying holdings of the ETF on a daily basis.
• Potential for Higher Returns: By deviating from the index, active ETFs offer the potential for higher returns, provided the manager's investment choices outperform the benchmark.

New opportunities for investors

Ultimately, active ETFs can offer a compelling choice for the right investor, blending the advantages of ETFs with the potential for above-market returns through skilled active management. At LPL Financial, financial professionals have access to multiple active ETFs, including hundreds of no-transaction-fee ETFs. In addition, the LPL Research team recently added a handful of active ETF model portfolios to the LPL Model Wealth Portfolios (MWP) platform. The new model portfolios are among the first of their kind in the industry, using Capital Group active ETFs.

Disclosures

Investing involves risk including the loss of principal. ETFs are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. LPL Financial does not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.

1. Active ETFs: Where to Find the Best Investment Opportunities | Morningstar

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