ETFs are becoming increasingly popular as more investors look for a simple, accessible way to diversify their portfolio. Learn more about active ETFs in this quick guide.
An exchange traded fund (or ETF) is an open-ended investment fund that you can trade on a stock exchange like the Australian Securities Exchange (ASX) or Cboe Australia, just like direct shares. When an investor purchases an ETF they receive units in the ETF, gaining access to the underlying assets that the ETF invests into, rather than owning the underlying shares or assets themselves.
ETFs can be actively or passively managed. Passive ETFs typically track the performance of an index, benchmark, sector or commodity. Active ETFs have a strategically selected underlying portfolio that is actively managed by a professional fund manager with the aim of achieving its investment objectives.
Here are some reasons to consider investing in ETFs:
Convenience: ETFs are simple and easy to invest in – you can trade them as easily as shares on a stock exchange and gain straightforward access to investments in different regions, asset classes and markets.
Diversification: One of the main reasons behind growing ETF popularity is the opportunity to diversify and balance your portfolio by accessing a range of different asset types. These may include Australian shares, international shares, property and infrastructure securities, commodities, foreign currencies and more.
Intraday pricing: An ETF allows investors to monitor and transact at a specific intraday price throughout the trading day.
Unlike passive ETFs, which aim to perform in line with an index or benchmark, active ETFs are actively managed by an investment manager – typically with the aim of outperforming a market benchmark or achieving a specific investment objective.
Active ETFs give investors access to experienced, active investment management specialists. Allowing investors to build portfolios and invest in ways that are suitable for their individual investment objectives and risk tolerances.
Currently, Macquarie offers three active ETFs – Macquarie Dynamic Bond Active ETF (Managed Fund), Macquarie Income Opportunities Active ETF (Managed Fund) and the Macquarie Walter Scott Global Equity Active ETF (Managed Fund). These active ETFs give investors easy access to Macquarie’s specialist global investment expertise, with a low barrier to entry.
Both active ETFs and unlisted managed funds give you access to a diversified pool of assets, but there are some important differences:
Minimum investment: The minimum order size for the first trade in an ASX-listed ETF is $500 worth of units, subject to your broker or investment platform’s requirements. This is known as the minimum marketable parcel. In contrast, unlisted managed funds generally require a larger minimum amount to invest such as $5,000 or more.
Ease of trading: It’s easy to buy or sell different ETFs on a stock exchange on a daily basis through your stockbroker, share trading platform or financial adviser. You can manage the entire ETF trading process entirely online. With unlisted managed funds, there is usually an application form process before you can invest which may be online or paper based.
Pricing transparency: ETFs offer live intraday pricing on the stock exchange, so you can generally see the recent market price at which units have been traded and will know the price at which you buy or sell units. With unlisted managed funds, the entry/exit price is not usually confirmed until one business day after the trade date.
With a range of different investment strategies, both unlisted managed funds and active ETFs can be used to achieve different investment outcomes such as growth or income. Both investment types can potentially manage risk during market downturns and leverage the experience of active management specialists.
Passive ETFs typically aim to replicate or perform in line with a broad-based securities index, such as the S&P500. Active ETFs are actively managed and generally aim to deliver ‘alpha’ or outperformance above the relevant benchmark. They are managed by a specialist team of investment managers and analysts to proactively seek investment returns within a chosen strategy, such as fixed income or global equities.
Active ETFs offer the following advantages:
Opportunity for outperformance: With active ETFs there is the potential to outperform the relevant market benchmark as they are actively managed and targeted to specific investment outcomes.
Risk management: Active ETFs offer the opportunity to be nimble in volatile markets. In a market downturn, the fund manager can reallocate the underlying assets to a more defensive strategy, for example.
Access to investment expertise: With Macquarie’s active ETFs, investors can enjoy everyday access to Macquarie’s global active investment expertise – previously only available through unlisted managed funds.
Unlike a passive ETF, an active ETF provides access to a team of investment specialists (including portfolio managers, analysts and researchers) who review the portfolio on a daily basis to actively manage the holdings. For this reason, active ETFs typically charge a higher management fee than passive ETFs.
Buying and selling an active ETF is simple.
To buy an active ETF: Buying an active ETF is the same as investing in direct shares. Active ETF units can be purchased through an online broker, full-service broker, financial adviser or investment platform.
To sell an active ETF: Just like with direct shares, active ETF sellers enter the order with a broker or adviser and they sell it on-market. Sellers can set a limit order or a market order the same way they would with a direct share trade.
For more information on investing in active ETFs, read our How to invest in active ETFs blog here.
You should check if an ETF’s units are trading at or around the Net Asset Value per unit – the value of the underlying assets held in the ETF at the end of the market trading day, minus fees, expenses and other liabilities.
The price of an ETF is influenced by market forces. If the market is volatile, the ETF price will likely be too. Markets tend to be more volatile near open and close and this is when spreads generally widen. Prices at the beginning of a trading day are influenced by breaking and overnight news and then tend to normalise.
Based on these trends, the general view is to avoid buying or selling ETFs within the first 30 minutes or during the closing auction at the end of the trading day. In early trading there may be a lower volume of trading activity, in conjunction with economic data news and changes in market sentiment which can lead to higher market volatility and result in the ETF price not aligning closely with its NAV per unit. The same may be said when trading in the closing auction (4pm to 4.10pm) where there is a heightened risk of trading an ETF at a price that is at a discount or premium to the underlying value of its assets.
ETFs can help you customise a well-balanced investment portfolio in line with your financial goals, risk appetite, and investment timeframe. They provide you with easy access to a wide range of investment approaches, from income generation to increased exposure in specific market niches. This includes markets that could be hard to reach directly, such as commodities or emerging markets.
For example, fixed income ETFs that are focused on capital preservation and income generation can potentially provide a defensive base for a portfolio. Depending on the ETF, income might be distributed monthly, quarterly, or annually.
Some investors might choose to invest in broad based ETFs as a core investment strategy and add more strategic active ETF allocations to complement the core holding with opportunities for potential outperformance, or ‘alpha’.
It’s important to keep checking your ETF allocations, as they can be a useful tool to rebalance your portfolio or adjust holdings as your investment goals change or the market evolves.
When evaluating an active ETF, there are few things to consider:
What is the experience and track record of the active ETF provider and fund management team? Their expertise matters when it comes to potentially outperforming the market.
How are securities selected and managed?
Does the active ETF invest in assets that align with your investment strategy?
What is the total cost of ownership including any management fees and transaction charges?
Does the objective and strategy of the active ETF align with your risk tolerance and overall investment goals, financial situation and needs?
Because active ETFs aim to outperform the market by observing and benefiting from market inefficiencies, their potential to deliver better investment outcomes depends on the knowledge and experience of the fund management team. So, it’s important to do some due diligence before deciding which active ETF to invest in.
It’s also important to consider your current portfolio mix, and how an ETF can rebalance or complement your investment strategy. For example, you may want to use an ETF as your core portfolio building block, gain access to markets or assets where you currently have limited exposure as a diversification play, or you may be looking for a fund that generates regular income.
Once you have a clear idea of your investment needs and goals, you can determine whether an active ETF is right for you.
All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk. This risk includes the potential for loss and unit price variability over the short or long term.
You can find more information on the risks of investing in an ETF in the Product Disclosure Statement (PDS) for the ETF. You should always consider the PDS and the Target Market Determination (TMD) for the ETF before deciding to invest in any ETF. Please also seek professional investment and/or tax advice where required before investing.
Easier and faster access to specialist investment expertise.
Actively managed to seek better returns.
ETFs typically provide greater price and holdings transparency than traditional unlisted managed funds.
Trade as easily as shares on the ASX.
Gain exposure to a range of investment strategies, regions and asset classes.