Actively managed ETFs offer a different investing approach.
When it comes to investing, so-called “index funds” are the go-to way for most Americans to access Wall Street. These products are typically benchmarked to a fixed list of investments, such as the 500 largest U.S. companies making up the S&P 500 or the 30 stocks making up the Dow Jones Industrial Average. While a passive investing strategy has its appeals, some investors prefer a more active approach to their exchange-traded funds and look for alternatives to the same old index funds. If that is your goal, here are seven actively managed ETFs to consider in 2021.
ARK Innovation ETF (ticker: ARKK)
A massive $23 billion fund that eclipses some index ETFs out there, this actively managed fund is focused on stocks that have long-term innovative potential as they delve into dynamic new technologies ranging from gene therapy to e-commerce. Top holdings among the roughly 55 components at present include electric vehicle maker Tesla (TSLA) and mobile payments giant Square (SQ). “Innovation” isn’t exactly a fixed sector, so investors will find companies from all over Wall Street even if the lion’s share of them loosely fall under the umbrella of technology stocks. This active ETF comes with an annual expense ratio of 0.75%, or $75 for every $10,000 invested. If you want a growth-oriented improvement over the typical index fund, ARKK could be worth a look.
First Trust Long/Short Equity ETF (FTLS)
This fund is a unique approach to actively managed ETFs, with a strategy that is both “long” by betting on the upside of some stocks and “short” by betting that others will take a tumble. As you can imagine, that means regularly going through the list of publicly traded companies on Wall Street and putting them on one side or the other. Right now, FTLS is long on familiar high-flying tech stocks like Apple (AAPL) and Microsoft Corp. (MSFT) and short on stocks including debt-laden telecom T-Mobile (TMUS) and oil services company Schlumberger (SLB). There’s risk here, as you have to hope it’s on the right side of the trade on individual stocks, but it’s an interesting alternative approach to index funds. The annual expense ratio is 1.55% — significantly higher than standard index funds. Keep in mind 0.6% of that is margin interest expense and fees associated with short selling. These costs are a structural component of any short strategy for those looking to pursue this approach to betting against stocks.
WisdomTree Emerging Markets Local Debt Fund (ELD)
While index funds are a cost-effective way to play straightforward strategies, other approaches to the universe of potential investments are not quite as simple. Emerging-market debt is a great example, as local conditions are unique in these regions, but debt offerings from corporations or local governments can often yield much higher returns than bonds from domestic blue-chip stocks or the U.S. Treasury. Wisdom Tree’s ELD fund is an actively managed solution to this problem, built around hard-to-access debt in local currencies that investors may not be able to tap into easily. There’s obviously more risk when you’re investing in the debt of nations like Peru or the Philippines instead of the U.S. or Europe, but a 12-month yield of 4.9% on this active ETF proves there is bigger income potential, too. The fund has an expense ratio of 0.55%.
Pimco Enhanced Short Maturity Active ETF (MINT)
Another interesting active fund in the fixed-income market is the MINT ETF from bond powerhouse Pimco. Sure, the yield is rather paltry at only about 1% right now. That’s because the fund is focused on very short maturities, with an aim to keep the average duration to less than one year. A shorter duration means smaller income potential, but in the current rising interest rate environment, that approach may be attractive to bond investors who don’t want to get locked into lower yields. And with an active approach, Pimco can try to navigate the interest rate environment better than a rigid index fund of bonds. The fund comes with an expense ratio of 0.36%.
FormulaFolios Tactical Income ETF (FFTI)
A modest fund with only about $215 million in assets under management, FFTI is an actively managed ETF for income investors who don’t want a vanilla bond fund and instead want to capitalize on the whole fixed-income marketplace. This ETF is a “fund of funds,” comprised of fewer than 10 other products — but unlike some shops that simply use this model to lump together their own products, FFTI looks to round up the best income-related offerings from across Wall Street. These include the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), among others. You could theoretically build and manage a bond portfolio like this yourself, but FormulaFolios does the work so you don’t have to. The expense ratio for this active ETF is also a bit high, at 0.97%.
SPDR DoubleLine Total Return Tactical ETF (TOTL)
Taking that approach one step further is this actively managed bond ETF from DoubleLine that actually holds a variety of bonds instead of other bond funds. At present, that gives TOTL a portfolio of more than 1,200 different positions spanning short-term U.S. Treasury bonds to corporate “junk” bonds and everything in between. It’s only a U.S.-focused fund, but collectively these positions add up to the entire domestic bond market and managers actively allocate cash depending on where they see opportunities. The fund comes with an expense ratio of 0.55%.
SPDR SSGA Global Allocation ETF (GAL)
GAL is an internationally focused and diversified investment that has nearly $300 million in assets under management. This investment is also comprised of a few other ETFs, like other offerings on this list, spanning a variety of asset classes and geographies to give investors a truly diversified portfolio in one single holding. About 20% or so of assets are in the flagship SPDR S&P 500 ETF Trust (SPY), one of the largest and most popular large-cap U.S. stock funds on the planet. There is also exposure to corporate bonds, emerging markets and small-cap stocks. If you want a one-stop shop, this globally diversified fund could be an interesting actively managed ETF. The fund has an expense ratio of 0.35%.
Seven of the best actively managed ETFs:
— ARK Innovation ETF (ARKK)
— First Trust Long/Short Equity ETF (FTLS)
— WisdomTree Emerging Markets Local Debt Fund (ELD)
— Pimco Enhanced Short Maturity Active ETF (MINT)
— FormulaFolios Tactical Income ETF (FFTI)
— SPDR DoubleLine Total Return Tactical ETF (TOTL)
— SPDR SSGA Global Allocation ETF (GAL)
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Update 03/17/21: This story was published at an earlier date and has been updated with new information.