Investors are increasingly moving into active ETFs from mutual funds. This is because the ETF structure may offer numerous benefits over mutual funds. Actively managed ETFs represent less than half of the roughly 4,000 U.S.-listed ETFs currently trading. Last year their assets under management crossed $1 trillion for the first time, partly due to record inflows.
At a high level, ETFs can potentially offer greater liquidity, transparency, tax efficiency, and lower costs. Many investors have historically looked to mutual funds for active management. However, active ETFs can pair the benefits of active management with the advantages of the ETF structure.
Liquidity
ETFs are generally more liquid than mutual funds because they can be bought and sold throughout the day, whereas mutual funds can only exchange hands at the end of the day.
Importantly, an ETF’s liquidity is primarily determined by its underlying basket of securities. This may allow an ETF to trade in amounts exponential to its average daily trading volume.
Tax Efficiency
An active ETF offers increased tax efficiency compared to a mutual fund. The creation/redemption mechanism at the heart of the ETF structure allows the vehicle the potential for better tax efficiency. That’s because there are less capital gains distributions.
Transparency
A well-known benefit of ETFs is the increased transparency. However, this is commonly misunderstood and mistakenly only associated with passive ETFs by many. Importantly, many active ETFs use a fully transparent, active structure, meaning they will publish their portfolio holdings underlying that day’s net asset value.
Costs to Investors
Shareholders in active ETFs are not impacted by the trading activity of others because ETFs trade on an exchange, and investors interact with an intermediary and not the fund directly. Therefore, each investor’s buy or sell trading costs are represented in the bid/ask spread at which they execute. Creations and redemptions occur at NAV + trading costs.
Additionally, there is no minimum to invest in active or passive ETFs, unlike mutual funds. Investors may purchase as little as one share, making ETFs highly accessible to all investors.
Newcomer to the Active ETF Space
The number of active ETF launches has grown tremendously since the passage of the ETF Rule in 2019, which allows custom baskets for all ETFs. That’s evened the playing field for all ETFs and allows active ETFs to fully access the tax benefits of the ETF structure.
Many active managers have entered the ETF space in recent years, including MFS Investment Management, a global asset manager. The issuer launched its first funds in December, adding them to a family of products that represents more than $625 billion in assets under management.
The MFS ETFs lineup includes five actively managed funds: the MFS® Active Growth ETF (MFSG), the MFS® Active Value ETF (MFSV), the MFS® Active International ETF (MFSI), the MFS® Active Core Plus Bond ETF (MFSB), and the MFS® Active Intermediate Muni Bond ETF (MFSM).
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