Actively Managed ETFs vs. Mutual Funds: A Structured Comparison


Now that the ETF landscape has grown to include actively managed funds, many investors are wondering how they size up relative to actively managed mutual funds. The differences are largely due to fund structure, and could be significant depending on your investment needs. Some of these differences are operational in nature and are beneath the surface, but can have an impact on fund performance and a client’s experience.

To help you make an informed decision when evaluating actively managed ETFs vs. mutual funds, we’ve developed the below table comparing the key features of each vehicle:

Feature Actively Managed ETFs Actively Managed Mutual Funds
Transparency Prior-day holdings are disclosed on a daily basis, which can give investors the assurance that comes with knowing exactly what they own. Regulatory requirements only mandate quarterly disclosure of holdings. However, many funds choose to publish holdings on a monthly basis.
Liquidity All ETFs—including those actively managed—trade intra-day on an exchange like a stock. Actively managed mutual funds are structured such that investors can only buy and redeem shares at the end-of-day net asset value (NAV).
Cash Drag ETFs are structured such that buyers and sellers of shares are matched up in the marketplace. This secondary market liquidity reduces trading in the underlying securities that could affect existing shareholders. As a result, portfolio managers may not need to keep as much cash on hand for redemptions, thereby reducing the potential for cash drag. Since mutual funds don’t trade in the secondary market, cash drag can be a significant consideration. Portfolio managers for these funds generally keep a few percent in cash for redemptions, which may impact performance over time either positively or negatively.
Settlement Timing Many ETFs settle T+3, which means three days after the transaction date. This timing matches the standard settlement of the underlying securities, which may reduce the amount of cash held for redemption. Generally settle one day after the transaction date (T+1). This timing may not match the settlement of the underlying holdings, potentially requiring a greater cash position and/or higher transaction costs.
Fee Structures Investors transacting in ETFs incur trading costs, including the bid/ask spread and potentially a commission. However, ETFs generally don’t include 12b-1 fees, which are annual marketing or distribution fees on the fund. Although mutual fund investors don’t pay a bid/ask spread or commission, a mutual fund’s management fee may include 12b-1 fees and other fees associated with servicing the vehicle.
Fractional Shares Cannot be traded in fractional shares, hindering the ability to trade small amounts regularly. Ability to trade fractional shares, making it easier to accommodate regular, smaller trades.

In essence, an actively managed ETF offers a markedly different set of features than an actively managed mutual fund as a result of the ETF structure. There are potential benefits to both, however, in an era of controlling costs and investors' desire for increased transparency, the active ETF structure may better suit an investor’s needs. This underscores how product structure selection should be an integral part of fund due diligence before making an investment.

The longstanding debate between active and passive typically centers upon ‘where’ to be active.  With the rise of active ETF strategies, the decision on ‘where’ to be active should also include ‘how’ to be active, and what product structure best aligns with the investor’s goals.  

Definitions

12b-1 fee 
An annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio.

Active Management
A portfolio-management approach that uses a human hand, such as a single manager, co-managers or a team of managers, to select, adjust and change a fund's holdings over time.

Cash Drag
A situation in which excess cash in the fund isn't invested in securities, potentially leading to underperformance when the market appreciates.

Fractional Share
A share of equity that is less than one full share. Fractional shares usually come about from stock splits, dividend reinvestment plans (DRIPs) and similar corporate actions. Normally, fractional shares cannot be acquired from the market, and while they have value to the investor, they can be difficult to sell. 

Net Asset Value
The price of a share determined by the total value of the securities in the underlying portfolio, less any liabilities.

Passive Management
An investment strategy that removes the active human hand from the process and replaces it with systematic, rules-based approaches to securities selection. Passive investing, notably index investing, is relatively cheap because it typically limits portfolio turnover and because the passive investing does not involve relatively costly research. 


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