When it comes to the advantages of the ETF wrapper compared to a classic mutual fund, the advantages of the ETF wrapper are clear. The ETF can be bought or sold at a fair price during the respective trading hours, while mutual fund investors need to take cut-off times and T+x trading into consideration when buying or selling a mutual fund. This means they won’t know the exact price of their fund shares until the trade is settled.

depositphotos

In addition, ETFs seem to be more transparent than a mutual fund, since an ETF does publish its portfolio composition more frequently than a mutual fund. That said, with the launch of active/semi active ETFs we may witness some ETFs which won’t publish their holdings on a daily basis.

Last but not least, ETFs are easy to understand, since ETFs are simply tracking their underlying index, so any investors knows if the index is up, his ETF is up and vice versa. But wait, since there are also active ETFs available to investors around the globe, this statement is no longer true for all ETFs, as only passive ETFs are delivering the index returns without any cushioning or leverage. Therefore, investors in active ETFs need to understand how their ETF is positioned to make an educated investment decision and to know how the ETF behaves in comparison to a given index.

That said, there is an important lesson which the promoter of active ETFs can learn from their mutual fund peers. Within the fund selection process fund selectors evaluate the investment process of mutual funds and the promoters of actively managed mutual funds are well prepared to deliver all information needed to them, to do so. Since active ETFs are still somewhat new products, the promoters of active ETFs may think that they can sell these products in the same way as they did so successfully with passive ETFs. From my point of view, such an approach will unfortunately not work well, since fund selectors and investors, especially those who are used to ETFs, want to understand how the portfolio is composed and how the fund manager may react in phases of market turmoil.

With regard to this, the promoters of actively managed ETFs should take a look on how active managed mutual funds are sold to the investors and adopt those parts of this approach which they are missing in their current sales approach. But don’t be a copycat, innovate don’t imitate. I would assume that this would help to raise even more investor interest for active ETFs, since a clear explanation of the investment process would help to increase the transparency of active ETFs.

More By This Author: