Actively Managed ETFs vs. Passive ETFs: A New Era for Investors

South Africa's investment landscape is experiencing a fascinating shift. The traditional dominance of unit trusts is being challenged by the burgeoning popularity of Exchange-Traded Funds (ETFs). But within the ETF space itself, a further evolution is unfolding: the rise of Actively Managed ETFs (AMETFs). In this article, we’ll unpack the active vs. passive ETF debate across various investment categories and explore how some unit trusts are making the leap into the world of ETFs.

What Exactly is a Passive ETF?

Passive ETFs are the bread and butter of long-term, low-cost investing. They aim to replicate the performance of a particular index, like the S&P 500 or the JSE Top 40. Because they’re following a predetermined basket of stocks or bonds, there's little need for a fund manager to make day-to-day decisions. This keeps fees low and transparency high — two factors that have made passive ETFs extremely popular.

Key Features of Passive ETFs:

• Low fees: Fund managers aren't doing much beyond ensuring the ETF tracks its index.
• Long-term focus: Passive ETFs are great for investors who want steady growth without having to worry about market fluctuations.
• Diversification: You get access to a broad market or sector without having to buy individual stocks.

But there's a downside — because passive ETFs simply follow the market, they can’t outperform it. You're locked into whatever the index delivers, for better or worse.

Enter Actively Managed ETFs

Actively Managed ETFs, on the other hand, offer a different approach. Here, a fund manager or team actively picks stocks, bonds, or other assets, attempting to outperform a given benchmark. Managers can adjust the portfolio based on market conditions, trends, or other opportunities.

Key Features of Actively Managed ETFs:

• More flexibility: Fund managers can move in and out of investments based on current events or emerging opportunities.
• Higher fees: Active management requires expertise, so you pay for it, though fees are still generally lower than those of unit trusts.
• Potential for outperformance: Because the fund isn't tied to an index, it has the opportunity to beat the market.

For investors who believe in market timing, sector-specific opportunities, or just prefer a hands-on approach, Actively Managed ETFs are a compelling option.

Passive vs. Active by Investment Category

When deciding between passive and active ETFs, the investment category plays a significant role. Here’s a breakdown:

1. Equities:

• Passive: Broad-based equity indices like the S&P 500 or FTSE/JSE Top 40 are often passively tracked. They offer exposure to large segments of the market with minimal risk.
• Active: In active equity ETFs, managers might target specific investment strategies like growth stocks, emerging markets, or undervalued companies. Managers use stock selection to build an investment portfolio that will outperform a market index.

2. Bonds:

• Passive: Bond ETFs that follow indices give you broad exposure to fixed-income securities.
• Active: Active bond ETFs allow managers to pick bonds based on interest rate predictions, credit conditions, or inflation expectations, giving investors a chance to outperform the index.

3. Commodities:

• Passive: Commodity ETFs often track benchmarks like the price of gold or a basket of raw materials through long term physical ownership.
• Active: Managers actively adjust the weighting of different commodities based on geopolitical events or market trends, which could lead to higher returns.

4. Sector-Specific:

• Passive: These ETFs track specific sectors like technology or healthcare.
• Active: Fund managers will pick companies and investment instruments within sectors they believe have the best chance of outperformance, perhaps opting for specific tech firms instead of a broader tech index.

A New Milestone: Pioneering the Conversion of Unit Trusts into ETFs

While there’s been growing interest in ETFs over the years, EasyETFs upcoming conversion marks a groundbreaking milestone -  transferring investors and a fund’s performance track record from Unit Trusts to ETFs.

Here’s why this conversion is happening:

• Lower Costs: ETFs, both passive and active, generally have lower management fees than Unit Trusts.
• Increased Liquidity: Unlike Unit Trusts, which can only be traded at the end of the trading day, ETFs trade like stocks throughout the day, giving investors greater flexibility.
• Transparency: ETFs disclose their holdings on a daily basis, whereas Unit Trusts may only partially do so monthly or quarterly.

We’re seeing more Unit Trusts - particularly those with high costs and underperformance - make the switch to ETFs to attract cost-conscious investors who still want some level of active management.

So, Which Should You Choose?

The decision between Actively Managed ETFs and Passive ETFs often comes down to your investment goals and risk tolerance. Passive ETFs are excellent for those seeking low-cost, long-term growth without too much fluctuation. Actively Managed ETFs, on the other hand, appeal to investors who want to beat the market and are willing to pay slightly higher fees for that opportunity.

The Future of Investing: A Spectrum of Options

This trend towards AMETFs doesn't signal the demise of passive ETFs or unit trusts. Instead, it paints a picture of a more diverse investment landscape in South Africa. Investors now have a wider spectrum of options to choose from, catering to their unique risk tolerance, investment goals, and preferred level of management involvement.

Remember: EasyEquities offers a comprehensive selection of both passive and actively managed ETFs to empower your investment journey. Visit our platform today to explore the possibilities!

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