Exchange-traded funds, more commonly known as ETFs, have become a familiar feature in investment portfolios over the past two decades. Initially popular for their simplicity and low cost, ETFs were traditionally associated with passive investing as they were tracking an index like the JSE Top 40 or a global equity benchmark. More recently, however, a new variation has gained traction – the actively managed ETF. While the structure remains familiar, the way these funds are run introduces an important shift in how investors can access investments that are professionally management.
At its core, an ETF is an investment fund that trades on the stock exchange in the same way a listed share does. When you buy an ETF, you are effectively buying a basket of underlying assets, which could include shares, bonds, property securities or commodities. ETFs are designed to provide diversification in a single investment and are priced throughout the trading day, unlike unit trusts which are priced only once daily. In South Africa, ETFs are listed on the JSE and can be accessed through most investment platforms and stockbrokers, making them widely available to retail investors.
Traditionally, ETFs have been passively managed which means the fund simply aims to replicate the performance of a specific index by holding the same securities in the same proportions. There is thus no attempt to outperform the market but rather the goal is to match it as closely as possible, at a low cost. Actively managed ETFs take a different approach. Instead of following a predefined index, a professional investment team makes ongoing decisions about which securities to include, exclude or adjust within the fund.
In practical terms, an actively managed ETF still trades on the JSE like any other ETF, but behind the scenes there is a portfolio manager applying a specific investment philosophy. This could involve selecting shares based on different themes or characteristics such as valuation, quality, income generation, sustainability factors or macro-economic views. The manager may increase exposure to certain sectors, reduce risk during volatile periods, or take advantage of opportunities as market conditions change. These decisions are guided by research and analysis, rather than a fixed index rulebook.
One of the key attractions of actively managed ETFs is that they combine the accessibility and transparency of ETFs with the expertise of active management. Investors can see what the fund holds, typically on a daily basis, and can buy or sell it at market prices during trading hours. At the same time, they benefit from professional oversight that aims to add value over time, particularly in markets that are inefficient or prone to sharp cycles.
Another benefit lies in cost efficiency relative to traditional active funds. While actively managed ETFs are generally more expensive than passive ETFs, they often carry lower fees than actively managed unit trusts since their structure allows for operational efficiencies, which can help keep costs contained. For investors who want active decision-making without paying the highest active management fees, this can be an appealing middle ground.
Actively managed ETFs can also offer improved risk management. In times of market stress, a passive ETF remains fully invested regardless of conditions, but an active manager, on the other hand, can reduce exposure to overvalued assets, increase defensive holdings or hold more cash where permitted. This flexibility can be particularly valuable during periods of heightened volatility, such as those driven by local political uncertainty, global interest rate shifts or currency pressure on the rand.
That said, actively managed ETFs are not without drawbacks with the most obvious being cost. Higher fees mean the manager needs to consistently add value to justify the expense. If the fund underperforms its benchmark after fees, investors may end up worse off than they would have been in a low-cost passive alternative. Performance is also dependent on the skill and discipline of the investment team, which introduces manager risk.
Another consideration is that active strategies can lead to higher portfolio turnover. While this is managed within the ETF structure, frequent trading can increase transaction costs and, in some cases, lead to greater tracking variability. Investors should also be mindful that not all active strategies perform well in all market environments, and short-term underperformance is always a possibility.
Ultimately, actively managed ETFs reflect the evolving needs of investors who want flexibility, transparency and professional insight, all within a familiar and accessible structure. Used thoughtfully, they can add depth and balance to a long-term investment plan.