ACTIVE ETFs

Learn how active ETFs combine active management with the liquidity and cost-efficiency of an ETF, helping investors seek better returns and diversification.

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UNDERSTANDING ACTIVE ETFs

Active ETFs are investment funds managed by professional portfolio managers who actively select and adjust the fund’s holdings in an effort to outperform the market, deliver a specific outcome or gain exposure to hard-to-index markets. Managing an active ETF involves ongoing analysis and decision-making based on market conditions. In contrast, index ETFs seek to replicate the performance of a specific index.

Actively managed investment strategies delivered through an ETF wrapper, combine the characteristics of traditional active mutual funds, with the access, cost-efficiency and transparency of an ETF.
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Title on screen: Active ETFs

Brenda: Active ETFs are one of the next frontiers of investor innovation and they are doing so much more than just bringing the potential to outperform. Active ETFs today can offer investors the opportunity to protect against market volatility, to invest towards specific outcomes, and to gain exposure to thematic strategies and the different factors that drive returns.

Daniel: We’re seeing investors of all types using active ETFs for different reasons and to achieve different goals. From individual investors using active bond ETFs to help provide sustainable income; and insurance clients using buffer ETFs to help cushion against market volatility; to some of the world’s largest institutions using them to help generate outperformance and enhance portfolio returns.

Wee Lynn: Bond ETFs can be active too. While most investors are familiar with the Bloomberg U.S. Aggregate Bond Index or Bloomberg Global Aggregate Index, there is a growing universe of bonds that investors want to access but are not part of these benchmarks. And so, active strategies can help provide more diversified portfolios and unlock opportunities especially in parts of the bond market that could be harder to reach.

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BENEFITS OF ACTIVE MANAGEMENT AND ETFs

Incorporating active insights can help investors in the following ways:

  1. Market dispersion can unlock performance: Increased market volatility and uncertainty could lead to increased stock market dispersion, resulting in greater difference in performance across companies, sectors, geographies and asset classes. The greater the dispersion, the greater the potential for managers to generate returns above benchmarks, or alpha1. Active management can broaden the investment universe and increase flexibility, which may enable managers and funds with strong records of performance to capture more alpha opportunities.
  2. Risk management: Portfolio managers of active ETFs can incorporate proprietary research and react in real-time to evolving market conditions. This gives managers freedom to respond to market inflection points as they seek to outperform benchmarks, target certain investment outcomes, or react to a changing market.

CASE STUDY: USING ACTIVE ETFs TO REPLICATE PRIVATE MARKET EXPOSURES

A large pension fund had significant capital committed to illiquid private market funds but faced two key issues:

  • Cash drag while waiting for capital calls
  • Underutilized risk budget due to excess cash holdings

They wanted to maintain exposure to macroeconomic risk factors (e.g., real rates, credit, inflation) typically accessed through private markets, but in a liquid, scalable format.

Our BlackRock team customized a basket of active ETFs to replicate the macro exposures of:

  • Real estate equity
  • Private equity
  • Infrastructure equity

These ETFs were selected based on their ability to: 

  • Capture macroeconomic sensitivities similar to private assets
  • Provide daily liquidity
  • Reduce the J-curve effect by keeping capital fully invested from day one

The customized ETF basket closely tracked the risk-return profile of the client’s private market portfolio, and helped reduce their cash drag and improve capital efficiency. Therefore, following an active ETF strategy provided transparency, liquidity, and scalability, all while staying within the client’s risk budget.