Management style
ETFs predominantly employ one of two management styles: active or passive.
Active ETF management:
Active ETFs strive to outperform their benchmark index. Portfolio managers actively select and adjust the assets within these funds, aiming to generate returns that surpass the index they are compared against. This hands-on approach often results in higher fees due to the expertise and effort involved. While managers do track indices, their decisions are not strictly bound to them, providing room for strategic asset allocation and potential outperformance.
Advantages:
- Potential for higher returns
- Professional management
- Flexibility in asset allocation.
Drawbacks:
- Higher fees
- Risk of underperformance
- Less predictable performance
Passive ETF management:
Passive ETFs aim to mirror the performance of a specific index, holding assets in the same proportion as they are represented in the index. They seek to replicate the returns of this index, often resulting in lower fees for investors due to the absence of active management. Passive ETFs support intraday trading, allowing investors to buy and sell shares during market hours.
Advantages:
- Lower fees
- Predictable performance
- Intraday trading availability
Drawbacks:
- Limited to the index performance
- No potential for outperformance
- Less flexibility in responding to market changes