Exchange-traded funds (ETFs) appeal to investors because of their tax efficiency and typically low fund expenses, due in part to their status as passively managed index funds. But investors now have another ETF option: actively managed exchange-traded funds.
Actively managed ETFs offer several potential advantages over their mutual fund counterparts. Holding actively managed mutual funds along with ETFs may offer broad coverage across a variety of market sectors.
The ETF Appeal
Like mutual funds, ETFs hold a variety of stocks and provide exposure to the overall market or a specific market segment. Unlike mutual funds, which are priced at the close of any given trading day, ETFs trade on an exchange like stocks and can be bought or sold anytime the markets are open. ETF investors have access to the same tools available to stock investors, such as buying on margin, short selling, and setting limit orders. And investors can monitor the fund’s investments since the SEC requires a daily disclosure of the fund’s holdings. In a volatile market, investors may benefit from ETFs’ liquidity and transparency.
The Tax Factor
Actively managed ETFs generally can be more tax efficient than active mutual funds because investors pay capital gains tax only when they sell appreciated shares. Mutual fund shareholders, on the other hand, pay tax on any capital gains distributions they receive, even if they haven’t sold their own shares.
Actively managed ETFs are relatively new investment products, so they don’t have much of a track record. Looking at the background and past performance of the fund’s portfolio manager may help investors make a decision. Holding mutual funds in addition to ETFs may provide broader market coverage.
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