How to know if actively managed ETFs are right for your portfolio

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Exchange-traded funds are often associated with passive strategies. But money has also poured into the actively managed version of ETFs, as investors crave more precision, experts say.

While passively managed ETFs aim to replicate an index, such as the S&P 500, active managers are more hands-on, trying to outperform a specific benchmark.

Active ETF managers may routinely “check under the hood” with a process-based approach, said certified financial planner Jon Ulin, managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida.

Actively managed U.S. ETFs jumped to nearly $275 billion in net assets in September, up from about $140 billion the previous year, according to Morningstar data, making up just over 4% of the overall U.S. ETF market.

Experts say there are several reasons for the explosive growth.

“I think the one common thread among a variety of different things is that ETFs are becoming the vehicle of choice for a larger number of investors,” said Ben Johnson, director of global ETF research for Morningstar.

Lower costs

One of the biggest selling points of ETFs over mutual funds is cost, and active ETFs are no exception.  

Typically, ETFs are less expensive than mutual funds, averaging 0.62% in fees, according to Morningstar, compared to 0.71% for an active stock mutual fund, the Investment Company Institute reports.

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“Over the past year, we have pivoted a good bit of our client model portfolio holdings from mutual funds to ETFs to reduce investment expenses and help to lower taxes in non-retirement accounts,” Ulin said.

Of course, active ETF fees may be higher than equally-weighted passive ETFs, which average 0.41%, according to Morningstar.

More precision

Tax efficiency

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