Actively managed ETFs do not track an indexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition. Instead they try to meet a particular investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition objective by investing in a portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition of stocks, bonds or other assets. Active ETFs, like actively managed mutual funds, have more turnover than index ETFs because a portfolio managerPortfolio manager An investment professional who manages your investment portfolio. For example, they buy, sell and monitor investments that fit their clients’ goals and tolerance for risk.+ read full definition actively trades the investments in the portfolio.
Risks of actively managed ETFs
It may be difficult to find an appropriate benchmarkBenchmark A yardstick that you can use to measure the performance of an investment. Example: a stock market index may be a benchmark you can use to compare how well your own stocks are doing.+ read full definition to monitor ETF performance since active ETFs can be fairly flexible in terms of what they investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in.
Actively managed ETFs also carry the additional risk of front running. Some ETFs disclose their holdingsHoldings Shares or other interests in a business. Also refers to investments in a portfolio.+ read full definition every day – that means everyone can see where an active ETF’s portfolio manager is putting the fund’s money and, if they want, they can try to replicate the fund’s holdings. This process can drive a stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition’s price up higher as many investors try to copy the strategy of a particular manager.
An actively managed ETF buys and sells investments based on the ETF’s investment objective and the portfolio manager’s strategy.
Learn more about the risks of ETFs.