What are active ETFs?
Exchange-traded funds (ETFs) are like the ultimate investment buffet. When you buy an ETF, you immediately own a small slice of each of the many stocks or bonds it contains. And you don’t even need to leave the house for this feast: ETFs trade on stock exchanges, so you can buy and sell them just like an individual stock.
You can cut and slice them a few ways, but there are broadly two types of ETFs: active and passive.
A passive ETF buys you a slice of an entire stock market. See, these funds aim to replicate the performance of the corresponding market index by using a buy-and-hold strategy – hence the “passive” label.
Active ETFs, on the other hand, seek to outperform the market. So instead of simply tracking an index, these funds have managers who buy and sell holdings at certain times in an effort to make market-beating returns.
Both types get you instant portfolio diversification with minimized volatility. Active ETFs, in particular, unlock asset classes besides stocks, and more complex investment strategies usually exclusive to institutional investors. For you, that’s a chance to potentially outperform the market while still investing in line with your individual goals. Better still, they cost a lot less than mutual funds or implementing the strategies yourself.
Let’s see how they work in practice: