Six common myths about active ETFs

ETFs have become an increasingly important portfolio implementation tool, yet misconceptions remain about how they work and the role they can play. In particular, the growth of actively managed ETFs challenges some long-held assumptions about the ETF structure. Here, we examine six common ETF myths.

Myth 1: All ETFs are based on passive strategies

The ETF is a wrapper that provides access to an underlying investment strategy. When they were first introduced, ETFs were primarily associated with passive, index-tracking strategies. Increasingly, ETF offerings are actively managed, with a variety of strategies now available across equity and fixed income asset classes.

Myth 2: Passive ETFs are safer than active ETFs

The level of risk depends on the underlying investments and not whether an ETF is passively or actively managed. Active managers may have the flexibility to conduct research, seek to anticipate risks, and use professional judgment to identify securities with attractive return potential while limiting exposure to securities they believe present disproportionate risks. By contrast, a passive ETF generally seeks to replicate or track an index and does not give the portfolio manager the same discretion to respond to security-specific risks or changing market conditions.

Myth 3: Active managers can’t outperform index funds or passive ETFs

Active management does not guarantee outperformance, and results vary considerably among managers. However, skilled active managers may outperform by applying proprietary research, independent judgment and disciplined portfolio construction to identify opportunities and risks that an index-tracking approach may not capture. Fees, investment process, and the consistency of implementation remain important considerations when assessing an active strategy.

Myth 4: ETFs are only for short-term trading and market timing

Although ETFs offer the flexibility to trade on an exchange during market hours, they can also be used as long-term strategic holdings. Their structure can provide cost-effective access to a range of investment strategies, although investors should consider ongoing charges, bid/ask spreads, and other transaction costs.

Myth 5: Active ETFs are opaque and do not disclose their holdings

ETF portfolio disclosure practices can vary by strategy, structure, domicile, and regulatory framework.  The majority of active ETFs disclose their complete holdings daily, while others may use different disclosure approaches permitted under the applicable rules. For some active strategies, less frequent or partial disclosure may help protect proprietary research and trading decisions. Investors should review the fund’s legal documents to understand its disclosure approach.

Myth 6: Active ETFs with lower daily trading volume are less liquid

An ETF's average daily trading volume is not, by itself, a reliable measure of its liquidity. ETF liquidity also reflects the liquidity of the underlying securities and the ability of authorized participants and market makers to facilitate the creation and redemption process. As a result, an ETF with relatively low secondary-market trading volume may still be able to accommodate larger trades when its underlying holdings are liquid and market-making conditions are supportive.

Conclusion

The ETF structure does not determine whether a strategy is active or passive, short- or long-term, or inherently more or less risky. Professional investors should look beyond the wrapper and assess the underlying strategy, holdings, costs, liquidity, and structure in the context of their portfolio objectives.

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