Index exchange-traded funds, or ETFs, are a proven, low-cost way to achieve market returns that approximate the performance of a given securities index or benchmark. The SPDR Dow Jones Industrial Average ETF Trust (ticker: DIA), to take one example, is designed to match the performance of the Dow Jones Industrial Average after subtracting the fund’s low 0.16% expense ratio.
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There is one thing index funds can’t do: deliver alpha. That is to say, index ETFs don’t outperform their benchmarks because that’s not what they were designed to do. Potentially beating the market by outperforming the major indexes necessitates professional active management by the best money managers in the world.
Actively managed ETFs leverage the skill, expertise, research and even gut instincts of the best minds on Wall Street in an attempt to produce superior results for shareholders. Active managers have the flexibility that static indexes lack. Portfolio managers of actively managed funds can make strategic decisions and adjust asset allocations instantly based on ever-changing news and market conditions. They can manage the various risks and make timely moves based on market volatility, unforeseen changes in the economy and other factors.
In short, while indexing has its place, the human element in investing can’t be duplicated or replaced. The professional decision-making and potential for downside protection inherent in active portfolio management can be invaluable.
If you appreciate active management and personal engagement in investing, or if you’re looking to supplement or enhance an index ETF portfolio by adding some actively managed funds, consider this list of seven of the best actively managed ETFs to invest in today:
| Actively managed ETF | Expense Ratio | One-year Performance* |
| T. Rowe Price Blue Chip Growth ETF (TCHP) | 0.57% | 47% |
| ARK Innovation ETF (ARKK) | 0.75% | 24.2% |
| SPDR DoubleLine Total Return Tactical ETF (TOTL) | 0.55% | 2.7% |
| Blackrock Large Cap Value ETF (BLCV) | 0.55% | 27.8%** |
| Fidelity Magellan ETF (FMAG) | 0.59% | 40.5% |
| Invesco Active U.S. Real Estate Fund (PSR) | 0.35% | 3.6% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% | 14.9% |
*As of March 31, 2024.**BLCV was created on May 19, 2023.
T. Rowe Price Blue Chip Growth ETF (TCHP)
The portfolio managers at the $553 million ETF, TCHP, invest in large-cap and mid-cap stocks that they consider to be blue-chip growth companies. They look for well-established, profitable firms with superior growth potential compared to their peers and the broader market.
In addition, managers evaluate the income statements, balance sheets and cash flow numbers of every company they look at. They will exclude any stocks that don’t have strong financial fundamentals. They prefer companies with seasoned executives who have long tenures with the firms, and TCHP only invests in stocks that have demonstrated solid market leadership.
For the one-year period ending March 31, 2024, TCHP logged an impressive 47% return based on NAV, beating the S&P 500 by more than 17%. That kind of outperformance over 12 months is exceptional. You can’t count on those kind of numbers over the long run, but that performance is a good example of what quality active management can do. The fund has an expense ratio of 0.57%.
ARK Innovation ETF (ARKK)
Cathie Wood — the portfolio manager of ARKK — is one of the most experienced and high-profile asset managers on Wall Street. Over her more than 30 years in the investment industry, her name has become synonymous with high-flying, innovative growth-stock investing.
As CEO and CIO of ARK Investment Management LLC, Wood oversees close to $17 billion in ETF and specialty fund assets, including the $7.8 billion she manages in ARKK. As its name implies, ARKK concentrates on highly innovative companies that Cathie Wood feels have the potential to disrupt a sector — especially technology and health care — in a positive, money-making way. She seeks large-scale capital appreciation over a long investment horizon by investing in stocks with groundbreaking technology and innovative products.
Potential investors in ARKK should be aware, however, that this ETF can be very volatile. It can experience drastic moves to the downside as well as to the upside. ARKK currently holds very aggressive stocks like Tesla Inc. (TSLA) and UiPath Inc. (PATH). Shareholders have to be ready to endure large and prolonged drawdowns on the way to potentially big gains down the road.
Some investors will balk at the fund’s 0.75% expense ratio. Others feel that Cathie Wood’s expertise is well worth paying for.
SPDR DoubleLine Total Return Tactical ETF (TOTL)
It’s rare to see a bond fund with total return as a primary objective, but that’s exactly what TOTL is. The $2.8 billion fund uses the Bloomberg US Aggregate Bond Index as its benchmark, but its managers try to outperform that index by strategically buying bonds they expect will appreciate during interest rate and bond market cycles.
As most investors are well aware, the U.S. economy recently exited a prolonged period of rising rates and is about to embark on a rate-cutting cycle. They also know that when rates go down, bond prices tend to go up.
The timing of rate cuts is in the hands of Federal Reserve Chair Jerome Powell, but based on his recent testimony before Congress, there can be little doubt of his intention to start slashing the fed funds rate sometime this year. This scenario is tailor made for TOTL. The fund invests in bonds of any credit quality — from junk to AAA. The ETF managers are free to choose the bonds they think will benefit most from the rate cuts that are certainly in our future.
The current yield for TOTL is 4.9%, a reasonable income for a diversified bond fund. The fund’s expense ratio is 0.55%. That figure reflects the intensive management style of this unique fund.
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Blackrock Large Cap Value ETF (BLCV)
BLCV selects the stocks for its portfolio from the Russell 1000 Value Index. But make no mistake: This fund is an actively managed ETF run by Blackrock’s highly respected income and value team. Under the direction of team leader Tony DeSpirito, the managers look for large-cap equity investments that they feel are being significantly undervalued by the broader market.
The fund’s inception date is May 19, 2023. There’s no doubt that the fund’s youth accounts for the fact that it only has $7.2 million in assets under management. Investors should not be put off by the fund’s relatively small size, however. Smaller funds don’t have the capacity constraints that some larger funds do. They can accumulate shares and build positions freely, which can be a benefit to shareholders. BLCV has an expense ratio of 0.55%, which is in line with its large-cap value peers.
So far this year, value stocks have underperformed growth, but category performance is cyclical and the tide will eventually turn in favor of value. That’s why it makes sense to consider this fund today. Based on share price, BLCV has achieved an approximately 28% return over the past 12 months.
Fidelity Magellan ETF (FMAG)
Though not necessarily a carbon copy, FMAG is an $83 million ETF based on the Fidelity Magellan Fund, one of the most famous and popular open-end mutual funds on the market.
Except in extraordinary circumstances, FMAG will invest virtually all of its assets in stocks that exhibit both growth and value characteristics. The portfolio managers use in-depth fundamental analysis to identify stocks with superior growth potential. They screen for relative financial strength and sector leadership before making stock selections.
FMAG will include foreign stocks along with U.S. issues in the portfolio. Economic and market conditions are considered when making investment decisions. The expense ratio of the fund comes in at 0.59%.
An interesting aspect of FMAG is that it is in a unique class of funds called semi-transparent active ETFs. What this means to shareholders is that FMAG is not required to disclose all of its portfolio holdings to the public on a regular basis. As an alternative, they publish what they call a tracking basket. This basket of stocks generally reflects the fund’s holdings and performance but does not necessarily represent the actual portfolio.
Investors can expect FMAG to hold high-quality, established companies that enjoy competitive advantages in the marketplace. For example, Eli Lilly and Co. (LLY) and Broadcom Inc. (AVGO) are among the fund’s top holdings.
Invesco Active U.S. Real Estate Fund (PSR)
PSR is a $70.5 million, actively managed real estate investment trust, or REIT, fund that uses the FTSE NAREIT All Equity REIT Index as its stock selection universe.
The fund managers at Invesco screen the REITs that comprise the index by using quantitative and statistical analysis methods that are bolstered with advanced AI technology. The algorithms are designed to identify real estate companies that can offer a high and dependable income as well as the potential for superior capital appreciation.
Equinix Inc. (EQIX), Prologis Inc. (PLD) and Crown Castle Inc. (CCI) are among the fund’s top holdings and are prime examples of the kind of REITs found in the portfolio.
A close look at the funds holdings will reveal that PSR holds a few real estate operating companies, or REOCs. REOCs are similar to REITs but have a different corporate organizational structure and are not required to distribute income to shareholders.
The current yield on PSR is 3.1%. The expense ratio is 0.35%, which is fairly low for an actively managed fund but in line with other quantitative products.
JPMorgan Equity Premium Income ETF (JEPI)
The primary investment objective of JEPI is to produce a high level of current income. Capital appreciation is a real possibility but should be thought of as a secondary objective by any investor considering this fund.
JEPI is a $33.8 billion ETF that generates income by building a portfolio of quality dividend-paying stocks and aggressively selling covered call options against its holdings. The combination of stock dividends and recurring option premium income results in a high and sustained income for investors.
The fund invests in a diversified pool of low volatility stocks that are selected using a proprietary research process designed to identify stocks with above-average growth potential and attractive risk/return characteristics. The goal is to distribute income while delivering total returns compatible — though not identical — with those of the S&P 500.
The current yield of JEPI stands at 7.6%. The fund’s expense ratio is 0.35%, which is quite low considering the high options trading volume.
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7 Best Actively Managed ETFs originally appeared on usnews.com
Update 04/18/24: This story was previously published at an earlier date and has been updated with new information.
