What is an Active ETF?

Active Exchange Traded Funds (ETFs) are quoted on the Australian Securities Exchange (ASX) and are an easy way for investors to access the investment expertise of fund managers. Active ETFs are actively managed by a portfolio manager, who 'actively' manages the basket of underlying stocks with the aim of outperforming the market.

Active ETFs have unique features that distinguish them from other types of ETFs. This online platform is designed for investors who want to learn more about the technical elements of Active ETFs and why you may want to consider investing in them.

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  • The history of Active ETFs
  • Key features and benefits
  • How to choose an Active ETF

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What can Fidelity’s Active ETF offer investors?

Fidelity Australia’s Managing Director explains our Active ETF story and the benefits to investors.

 

Related insights

Actively Managed ETFs vs Managed Funds: Critical Differences

Actively Managed ETFs vs Managed Funds: Critical Differences

The universe of managed funds is huge and deciding where to place your assets can be as tricky as choosing single shares.

Why invest in an active ETF?

Why invest in an active ETF?

Why might investors consider active ETFs, rather than those that are designed to track the performance of sharemarket indices?

The rise and rise of ETFs

The rise and rise of ETFs

The number and variety of ETFs have risen sharply in recent years as their popularity has increased. Take a closer look at sharemarket ETFs and how they operate.

Why invest?
1

Actively managed

Active ETFs provide access to a fund manager’s investment expertise via a simple trade on the ASX.

Active ETFs are open-ended actively-managed funds quoted on an exchange. The fund is managed by a portfolio manager, who ‘actively’ manages the basket of underlying stocks with the aim of outperforming the market. An active manager seeks to reduce the downside risks during volatile periods in the market.

The power of active management

Many of Fidelity's actively managed equity fund outperform their underlying index, net of fees, by 1-2% pa over the long term. With the power of both time and compounding, this additional amount of annual return can have a big impact on your portfolio over the long term. See for yourself how the Fidelity Global Equities Fund has performed compared to the fund's benchmark.

    Fidelity Global Equities Fund
    0
    MSCI All Country World Index NR
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    Chart as at: 30 November 2018

    Total net returns represent past performance only. Past performance is not a reliable indicator of future performance. Returns of the Fund can be volatile and in some periods may be negative. The return of capital is not guaranteed. Benchmark: MSCI ACWI (All Country World Index) Index NR (effective 1 November 2011). Benchmark between December 2006 and 1 November 2011 was the MSCI World Index, and prior to December 2006 and 1 November 2011 was the MSCI World Index ex.Australia. NR: NR at the end of the benchmark name indicates the return is calculated including reinvesting net dividends. The dividend is reinvested after deduction of withholding tax, applying the withholding tax rate to non-resident individuals who do not benefit from double taxation treaties.

    All investments carry risks and diversification is not a guarantee for achieving returns nor a guarantee against potential loss of capital.

    Why you may want to consider Active ETFs

     
    How they work

    How Active ETFs differ in structure

    There is an increasing number of ways investors can access investment funds - some are available on the ASX and others aren’t, some are actively managed and others track the index. The below table helps to articulate the key differences between types of investment funds

    Compare Active ETFs with

      Active ETFs Passive ETFs Managed Funds (unlisted) Listed Investment Companies (LIC) Listed Investment Trusts (LIT)
    Availability ASX quoted ASX quoted Unlisted ASX listed ASX listed
    Management style Actively managed Passively managed / index tracker Actively and passively managed Actively managed Actively managed
    Corporate structure Trust Trust Trust Company Trust
    Liquidity
    • Open-ended
    • Issues / cancels units daily
    • Fund acts as a market maker to provide liquidity
    • Open-ended
    • Regularly issues / cancels units
    • Trades on the ASX
    • Uses third-party market makers to provide liquidity
    • Open-ended
    • Regularly issues / cancels units
    • Does not trade on the ASX
    • Closed-ended
    • Can only grow through placements, rights and Distribution Reinvestment Plans (DRPS)
    • Closed-ended
    Pricing
    • Live pricing on the ASX
    • Generally expected to trade at a tight spread around the NAV, reflecting the open- ended nature of the fund
    • Instant price confirmation
    • No cooling off rights (same as other listed securities)
    • Live pricing on the ASX
    • Generally expected to trade at a tight spread around the NAV, reflecting the open- ended nature of the fund
    • Instant price confirmation
    • No cooling off rights (same as other listed securities)
    • Entry / exit price generally not known until trade + 1 day
    • Cooling off rights as outlined in the Product Disclosure Statement (PDS)
    • Live pricing on the ASX
    • Can trade at a significant premium or discount to NAV, reflecting the closed- ended nature of the structure.
    • Live pricing on the ASX
    • Can trade at a significant premium or discount to NAV, reflecting the closed- ended nature of the structure.
    Disclosure All holdings are disclosed quarterly with a two- month lag, subject to ASX approval. The daily basket of holdings are typically disclosed. Typically, holdings are disclosed monthly with a 30-day lag. Required to disclose NAV monthly, but not required to provide portfolio information. Required to disclose NAV monthly, but not required to provide portfolio information.
    Minimum investment No minimum No minimum Typically A$25,000 No minimum No minimum
    Application process including anti-money laundering (AML) and know-your-customer (KYC)
    • Must have a broker account
    • No application form, AML or KYC required apart from the initial application for a brokerage account.
    • Must have a broker account
    • No application form, AML or KYC required apart from the initial application for a brokerage account.
    • Investing directly requires an application form, AML and KYC documents for each fund manager.
    • Must have a broker account
    • No application form, AML or KYC required apart from the initial application for a brokerage account.
    • Must have a broker account
    • No application form, AML or KYC required apart from the initial application for a brokerage account.
    Franking credits All trust structures (including LITs), must distribute all underlying income and realised capital gains to investors on an annual basis. The level of realised capital gains depends on trading activity within the strategy and the level of embedded capital gains within the portfolio holdings. As a trust, unitholders are responsible for any tax obligation arising from the distribution and should seek professional tax advice on this matter.     LICs have the ability to pay franked dividends.

    LITs must pay out any surplus income to investors in the form of distributions. These distributions carry the franking credit level allocated by the underlying investment.

    Can I invest in more than one ETF style ie passive and active?

    Active and passive funds can be used to create a portfolio to suit your investment objectives as determined by you or your adviser. Some asset classes are more suited to active investing and some to passive - and this also varies according to the risk you are prepared to take. Investors may choose to combine these strategies in their portfolio.

    Three popular styles of ETFs

    You’re investing in a fund where the fund manager applies an active investment approach seeking to achieve a specific return and risk outcome.

    Typically, the manager believes markets are semi-efficient and they can add value by choosing what to own and what not to own in the fund and managing the fund’s risk profile.

    By adopting this style of management of the risk and return, you have the opportunity to achieve a higher return and lower downside risk than the index or a passive fund.

    The fund will generally provide exposure to a relevant region/sector based on the investment mandate, but unlike a passive fund it is not required to hold all the companies in the relevant index and the underlying holdings are based on the fund manager’s assessment of the individual risks, valuation and company outlook.

    There is a management fee applied to this style of ETF because you are paying for an investment professional to monitor your portfolio.

    Smart beta is a generic term which lacks a strict definition; it can also be called advanced beta, alternative beta, strategic beta or strategic indicies.

    You’re investing into a fund that uses a passive rules - based approach (i.e buy companies which have low historical volatility) to try and exploit perceived systematic biases or inefficiency in the market.

    You’re investing in a fund which holds all the companies in the index and at the same percentage weight as the composition of the index, regardless of the prospects for the individual companies.

    This means your investment returns will track the ups and downs of the market.

    This is the cheapest option as there is minimal management fees charged for this type of fund as it only needs to replicate the index.

    How are Active ETFs priced?

    There are a number of unique features of an Active ETF which provides liquidity to investors:

    1

    Units in an Active ETF are traded at the market price on the ASX.

    2

    An Active ETF operates as an open-ended fund, and as a result is expected to trade relatively closely to the fund's NAV.

    3

    The Fund acts as the market maker and provides liquidity by issuing and redeeming units based on market demand.

     

    How to buy/sell

    An Active ETF is bought and sold via a broker in the same way as buying or selling a share on the ASX.

    The difference is that this one trade gives you exposure to a diversified portfolio of shares. Investors can view their Active ETF holdings alongside any other direct share holdings they have.

    Find out how to invest now.