In this article, we will consider why investors might consider active ETFs rather than those that are designed to track the performance of sharemarket indices.
Historically, most ETFs were designed to closely replicate returns from particular sharemarkets. US ETFs, for example, might seek to mirror the performance of the S&P 500, or Nasdaq index. So, if a share is a constituent of the benchmark index, it will very likely be owned by the ETF. Shares in the ETF are held according to their weighting in the relevant benchmark and managers have no discretion over investments. This is known as passive investing.
The premise of active investing suggests that skilled investors can beat the returns of an index by focusing on shares that are perceived to be undervalued. For example – the company’s growth prospects have not been recognised by the market or the company’s share price has fallen due to negative sentiment. In fact, the performance track record of managed funds shows that it’s possible to generate returns above those of sharemarket indices over the long term such as the Fidelity Global Equities Fund.
Large investment managers like Fidelity employ teams of specialised research professionals, who consider the merits of individual companies relative their competitors. Following this research, the fund manager buys shares that they expect to outperform the index average over time. Similarly, active managers will seek to avoid investing in stocks that are expected to underperform.
Essentially, the manager has filtered the universe of companies in the index and, as a result, the composition of an actively managed portfolio will differ from the benchmark index. More importantly, if the research proves accurate and the portfolio of shares performs as anticipated, returns from active portfolios will exceed those of the benchmark index. Actively managed funds may also help cushion the impact of market weakness and reduce the risk of permanent capital loss when share markets are losing ground.
Increasingly, leading investment firms are launching actively managed ETFs that aim to outperform the returns of comparable passive funds. In Fidelity’s case, we can access the stock selection skill of more than 400 dedicated research professionals globally, which enables us to gain knowledge and insights to make better investment decisions.
Investing in a global active ETF such as emerging markets can provide Australian investors with exposure to a wider selection of stocks than is currently available in the domestic share market and access to some of the world’s fastest growing economies and most innovative companies.
Like passively managed options, active ETFs provide easy access to share markets, with the benefit of immediate liquidity when the market is open and the ETF remains trading. With this in mind, and as investors seek to maximise their returns, it seems likely that active ETFs will become even more popular in the years ahead.
In Fidelity’s case, we can access the stock selection skill of more than 400 dedicated research professionals globally, which enables us to gain knowledge and insights to make better investment decisions.
