Exchange-traded funds (ETFs) have revolutionized the investment landscape, becoming a key pillar in portfolio strategies for a wide range of investors, from institutional to retail clients. Success demonstrated by the assets under management amounting to 11.600 billion dollars at the end of 2023 at a global level, achieved with an average growth rate of 16,9% in the last 10 years. In this in-depth analysis, we will briefly explore the world of ETFs, focusing on the key differences between passive and active management, with an analysis of actively managed ETFs that are opening up new perspectives and opportunities in the world of investments.
ETFs: a global panorama
ETFs, funds traded on the stock exchange, are distinguished by their structure which combines the characteristics of mutual funds with the liquidity and real-time tradability of shares. This "container" instrument allows investors to obtain exposure to a broad spectrum of assets: stock indices, bonds, diversified commodities, without considering the spectrum of thematic, sector and style strategies. The success of ETFs is based on their affordability; with an average TER (Total Expense Ratio, the overall cost of the fund) of 0,16% for equity exposures and 0,11% for bond exposures, ETFs have increasingly attracted the attention of investors looking for efficient building blocks for portfolio construction. Another distinctive feature is flexibility, understood as the possibility of valorising or disinvesting the investment immediately at market prices.
Passive management: under the sign of the index
Passively managed ETFs are designed to replicate the performance of a specific index, such as the S&P 500, the FTSE 100 or the domestic FTSE MIB, typically by market capitalization (in which the largest companies are selected and the weighting is based on dimension). This approach follows a "reproduction" strategy, aiming to maintain a composition in line with the underlying index in order to obtain substantially equivalent performances.
The advantages of passive management are:
- Reduced costs: The lack of active management reduces expenses, giving investors economic exposure to the index.
- Transparency: Investors know the composition of the index, improving transparency and understanding of the investment.
- Efficient diversification: Index replication offers automatic diversification even with a low investment.
- Systematicity: the indices follow objective construction rules that allow an always up-to-date representation of the market represented.
Active management: beyond indices
Unlike passive ETFs, actively managed funds rely on financial professionals who make active investment decisions. These managers seek to outperform the market through in-depth analysis, opportunity seeking and discretionary portfolio management. Managers can regularly reallocate resources based on market conditions, economic outlook and emerging opportunities.
The advantages of active management are: - Adaptability: Active management allows for a timely response to market dynamics and changing conditions.
- Specialist research: Financial analysts play a crucial role in identifying investment opportunities and mitigating risks.
- Potentially Better Return: In a volatile market environment, active management can generate superior returns compared to benchmark indices.
The best summary: actively managed ETFs
Actively managed ETFs combine the best of both worlds. In fact, they try to exceed the market return through active management, but maintain the structure of ETFs, offering liquidity, transparency and cost-effectiveness (the TER of actively managed ETFs, although typically more expensive than that of passive ones, can be lower than that of traditional active funds). This summary represents an option for investors looking to combine management expertise with the benefits of ETFs. However, as ETFs are conceived as asset allocation tools, active ETFs generally adopt maximum deviation targets with respect to the relevant benchmark indices, providing a detailed mandate to the manager.
In conclusion, much has been debated and much more will still be discussed regarding the choice between passive and active management and the factors that can make the choice between one style and another depend, among which the hypothesis of market efficiency represents the most relevant element. In this regard, ETFs, with their versatility and diversification of approaches, are defining new standards in the world of investments by combining these approaches that until a few years ago seemed irreconcilable.
