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Are active ETFs right for you?

Key takeaways

  • Some ETFs no longer have to disclose holdings daily.
  • This has led to an increase in the availability of actively managed ETFs.
  • Actively managed stock ETFs had not previously been offered widely, due to the potential opportunity costs associated with daily holdings disclosure.

The growth in exchange-traded funds (ETFs) has been astronomical since the first ETF launched in 1993. The ETF universe has nearly $7 trillion in assets under management.

Many investors and financial advisors like ETFs because they can offer tax advantages compared to some other alternatives, can be traded intraday, and offer transparency into underlying holdings, among other potential benefits. The degree of transparency is the differentiator between the new active stock ETFs and the vast majority of ETFs in the market today. And there are now more active ETFs (1,019, as of June 2023) than ever before.

A game changer for actively managed ETFs?

Many investors seek actively managed investments (like many mutual funds and ETFs) based on the belief that rigorous research, sophisticated portfolio construction, and expert trading may add value for shareholders. Actively managed ETFs are a portfolio of subjectively chosen investments by a fund manager, rather than those chosen via a rules-based index that defines a passively managed ETF. Essentially, active ETFs combine the potential benefits of an ETF structure with those of active management. The idea is to perform better than a benchmark index through flexible active management.

However, investments that combine the benefits of active stock picking and an ETF structure have not meaningfully taken off up to this point. Most fund managers have not broadly offered active ETFs because there are potential costs associated with full transparency in the form of daily holdings disclosure (which had historically been required of ETFs).

In recent years, the Securities and Exchange Commission (SEC) has granted an exemption to a handful of firms, allowing them to offer actively managed ETFs that are not required to disclose daily holdings. You may see these funds referred to as semi-transparent ETFs elsewhere. Investors can maintain transparency with access to most recent public holdings and, in some cases, into the fund’s current exposures and drivers of risk and return through daily proxy portfolios.1

The rule change has steadily made actively managed equity ETFs more widely available in the marketplace. Of course most, if not all, of the existing risks associated with ETFs also exist for actively managed ETFs (see disclosures for important information on additional risks associated with active ETFs). However, this innovative ETF structure has the potential to allow investors to capture more of the outperformance that active managers seek to provide by mitigating some front-running and trading risks.

The value of research

As part of a fund's management fee, investors pay active managers to conduct company research to identify stocks that might outperform and those that might underperform. Such research decisions have the power to add to shareholder returns.

However, those returns may take time to materialize in trading activity across a suite of funds, as individual managers make investment decisions based on their specific portfolio construction and risk mandates. If these research insights are revealed to the market before the desired investment position can be established, that can erode the potential value.

Flexibility to trade over time may enhance performance

To determine how quickly to build or reduce a position, traders use their expertise to balance the cost of liquidity with the risk of not executing a trade all at once (should market volatility lead to significant price changes). Because mutual funds and ETFs often trade in large volumes, asset managers frequently spread trades out over multiple days to reduce costs.

Disclosing trading activity to the market while positions are still being built or reduced could allow for increased front-running and preclude cost-saving trading strategies, thus leading to lower net performance. Opportunistic or algorithmic trading strategies could reduce trading costs even further for actively managed ETFs that are not required to disclose holdings daily. ETFs that do not need to disclose holdings daily may benefit from the ability to implement trading strategies that preserve more of the potential active management value for shareholders.

Investment implications

The shift to enable some firms to offer ETFs without the requirement to disclose holdings daily may help reduce the potential costs to shareholders associated with full transparency. At the same time, these new ETF structures are designed to provide transparency into the funds’ holdings and drivers of performance.

This change has led to greater access for investors who are seeking the benefits of ETFs and who believe in the potential of active management.

Find the right ETF for you

Use our screener to identify ETFs and ETPs that match your investment goals.

More to explore

Important Additional Risk Information: Fidelity Active Equity ETFs
These ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. These ETFs will not. This may create additional risks for your investment. For example, you may have to pay more money to trade the shares of these ETFs. These ETFs will provide less information to traders, who tend to charge more for trades when they have less information; the price you pay to buy ETF shares on an exchange may not match the value of each ETF’s portfolio. The same is true when you sell shares. These price differences may be greater for these ETFs compared to other ETFs because they provide less information to traders; these additional risks may be even greater in bad or uncertain market conditions; each ETF will publish on and a "Tracking Basket" designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF’s holdings, it is not the ETF’s actual portfolio. The differences between these ETFs and other ETFs may also have some advantages. By keeping certain information about the ETFs secret, they may face less risk that other traders can predict or copy their investment strategy. This may improve the ETFs’ performance. However, if the investment strategy can be predicted or copied, this may hurt the ETFs’ performance. For additional information regarding the unique attributes and risks of these ETFs, see section below. The objective of the actively managed ETF Tracking Basket is to construct a portfolio of stocks and representative index ETFs that tracks the daily performance of an actively managed ETF without exposing current holdings, trading activities, or internal equity research. The Tracking Basket is designed to conceal any nonpublic information about the underlying portfolio and only uses the Fund’s latest publicly disclosed holdings, representative ETFs, and the publicly known daily performance in its construction. You can gain access to the Tracking Basket and the Tracking Basket Weight overlap on or Although the Tracking Basket is intended to provide investors with enough information to allow for an effective arbitrage mechanism that will keep the market price of the Fund at or close to the underlying NAV per share of the Fund, there is a risk (which may increase during periods of market disruption or volatility) that market prices will vary significantly from the underlying NAV of the Fund; ETFs trading on the basis of a published Tracking Basket may trade
at a wider bid/ask spread than ETFs that publish their portfolios on a daily basis, especially during periods of market disruption or volatility, and, therefore, may cost investors more to trade, and although the Fund seeks to benefit from keeping its portfolio information secret, market participants may attempt to use the Tracking Basket to identify a Fund’s trading strategy, which, if successful, could result in such market participants engaging in certain predatory trading practices that may have the potential to harm the Fund and its shareholders. Because shares are traded in the secondary market, a broker may charge a commission to execute a transaction in shares, and an investor may incur the cost of the spread between the price at which a dealer will buy shares and the price at which a dealer will sell shares.

Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

1. Each asset manager has taken a slightly different approach to how they will comply with the disclosure requirements. For example, Fidelity is using a tracking basket and weight overlap disclosure.

Investing involves risk, including risk of loss.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917