Since the launch of the first active ETF in the U.S. market in 2008, the number of issuances and investment amounts have grown rapidly in recent years. Unlike passive ETFs that only track the original designated index, active ETFs are adjusted by fund managers based on their research analysis and investment strategies, in an attempt to beat benchmark indicators and create excess returns, and incorporate the characteristics of active mutual fund operations.
Active ETFs have many advantages for investors due to their design. Unlike the subscription to and redemption of open-end mutual funds, investors can buy and sell them at any time during trading hours on the exchange, providing intraday liquidity. However, like mutual funds, they can capture opportunities to beat benchmark indicators through the active operation of fund managers, rather than passively tracking the underlying index. Most active ETFs worldwide publicly disclose the constituents of their investment portfolios on a daily basis (except for a few semi-transparent active ETFs which release some of their portfolios daily or all of their portfolios monthly or quarterly), making the information relatively transparent compared to mutual funds. In addition, due to the central trading of active ETFs on exchanges, their channel and marketing costs are relatively low, and their expense ratios should be lower compared to those of mutual funds.
For the subscription to and redemption of mutual funds, managers need to frequently sell their holdings to meet the cash needs of investors for redemption, which will increase the cost of transactions. Additionally, selling positions may result in capital gains and increase investors’ capital gains tax burden when distributing proceeds to them. Therefore, fund redemption will affect other investors and reduce the tax efficiency. Although Taiwan does not levy capital gains tax, imposing transaction tax will increase transaction costs. However, active ETFs, like passive ETFs, can be redeemed by investors through physical delivery (i.e. a basket of securities) without the need to sell their holdings, and will not increase transaction costs or reduce tax efficiency, which will affect other investors.
However, investors should understand that although active ETFs can capture opportunities to beat benchmark indicators and achieve higher returns through active investment operations, it does not necessarily mean that their performance will be better than passive ETFs, as it depends on the investment operation ability and performance of managers. In addition, frequent buying and selling activities will increase the cost of trading, thereby affecting its performance and potentially increasing its volatility, and its expense rate will also be higher than that of passive ETFs.
As for the multi-asset ETFs currently traded on foreign exchanges, they can be regarded as a basket of ETFs with different types of asset portfolios (such as stocks, bonds, commodities, precious metals, and ETFs). When investors allocate assets and establish investment portfolios, due to the low correlation among different types of assets, investing in different types of asset markets has a better risk diversification effect and can establish more efficient and risk-diversified investment portfolios. Investors only need to buy a multi-asset ETF that suits their own attributes to achieve the desired asset allocation, which is quite convenient and simple. Besides this, the allocation cost is low, the buying and selling or adjustment is easy, and the information transparency is high. Common multi-asset ETFs such as stock bond ETFs can be roughly divided into the growth type, balanced type, and conservative type according to their allocation ratios. The growth type ETFs pursue wealth growth and allocate a greater proportion to stocks, such as 80% in stocks and 20% in bonds. The balanced type ETFs emphasize a balance between growth and stability, with a balanced allocation of stocks and bonds, such as 40% in stocks and 60% in bonds. Conservative type ETFs look for both stability and safety, with a focus on bonds, such as 20% in stocks and 80% in bonds.
With the development and growth of the ETF market, coupled with innovation in financial products and the opening and adjustment of relevant regulations, various types of ETFs have been launched one after another to meet the needs of investors. When choosing investment instruments, investors should fully understand the advantages and disadvantages of such instruments. For active ETFs or multi-asset ETFs, investors should examine their investment objectives and risk appetite to choose the suitable investment strategies and operations. At the same time, they should consider possible related costs, relevant information available, as well as the convenience and liquidity of trading. No type of ETF is definitely better than other types, and it all depends on the attributes and needs of the investor. Due to the wide range of options available for active or multi-asset ETFs, general investors may start with ETFs which have a lower complexity and are easy to understand and evaluate.