It has taken some time, but actively managed exchange-traded funds (ETFs) are finally gaining traction with investors.
According to Nicholas Elward, head of Institutional Product and ETFs at global asset management firm Natixis Investment Managers, assets of actively managed ETFs in the U.S. will jump to $400 billion by the end of 2022, double where they were at the end of 2020.
There are several reasons that explain the increased interest in active ETFs, says Elward.
First, increased market volatility has investors looking to cushion downside risk through active management and tactical stock-picking. Second, the introduction of semi-transparent ETFs in 2020 has led active managers to be more open to managing active ETFs, knowing that they won't be giving away their best ideas. Lastly, the trend of mutual funds converting to ETFs that began in 2021 will likely continue.
While actively managed ETFs remain a small part of the overall ETF market, investors can expect this to change in 2022 and beyond.
Here are seven actively managed ETFs to consider for your portfolio. This is a list of equity and fixed-income options that are right for a variety of risk tolerances and investing horizons.
Data is as of April 6. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Avantis U.S. Small Cap Equity ETF
- Assets under management: $4.2 million
- Dividend yield: N/A
- Expenses: 0.25%, or $25 annually for every $10,000 invested
The Avantis U.S. Small Cap Equity ETF (AVSC (opens in new tab), $46.60) is the youngest of the actively managed ETFs featured here. AVSC launched on Jan. 13, so there's only $4.2 million in total assets currently and no 12-month dividend yield.
"Small caps can play an important role in investors' allocations, and we are pleased to provide them with an option that complements what we already offer in the small-cap space," said Eduardo Repetto, chief investment officer at Avantis and co-manager of AVSC, in a mid-January press release announcing the fund's launch
The actively managed ETF looks to outperform the Russell 2000, a small-cap index comprising the 2,000 smallest stocks in the Russell 3000. The portfolio managers focus on companies with higher profitability and low valuations – using metrics such as book value and cash flow from operations – and typically invest roughly 80% of assets in U.S.-based small-cap stocks.
Avantis's philosophy is to provide its clients with diversified, tax-efficient, inexpensive ETFs that fit seamlessly into an investor's current asset allocation. AVSC is no exception. The ETF currently has 1,087 holdings with an average market cap of $1.6 billion, about half that of the Russell 2000.
The top three sectors by weighting in this small-cap ETF are financial services (20.4%), industrials (17.2%) and healthcare (13.7%). The ETF's 10 largest holdings account for just 4% of its total assets, and familiar names include Twinkies maker Hostess Brands (TWNK (opens in new tab)) and organic grocer Sprouts Farmers Market (SFM (opens in new tab)).
The ETF will make quarterly distributions in March, June, September and December.
Learn more about AVSC at the Avantis Investors provider site. (opens in new tab)
JPMorgan ActiveBuilders Emerging Markets Equity ETF
- Assets under management: $774.9 million
- Dividend yield: 1.5%
- Expenses: 0.33%
The JPMorgan ActiveBuilders Emerging Markets Equity ETF (JEMA (opens in new tab), $40.97) seeks to outperform the MSCI Emerging Markets Index, investing at least 80% of assets that are tied economically to emerging market countries. This includes companies whose primary business is located in an emerging market or one whose stock is mainly traded in one.
The three portfolio managers who run the fund all have at least 10 years of industry experience apiece and have been with JPMorgan for no fewer than eight years. As part of their goal of outperforming the benchmark over time, they will underweight or overweight certain countries and sectors relative to the index.
JEMA currently consists of 501 holdings invested across 31 countries. The top three countries by weight are China (28.7%), Taiwan (16.6%) and South Korea (12.4%). Asia accounts for almost 80% of the portfolio's total assets. And while this fund is focused on emerging markets, a small percentage of its portfolio (1.6%) is currently in U.S. assets.
As for sectors, the biggest three by weighting are technology (25.4%), financials (24.5%) and consumer discretionary (11.7%). Top 10 holdings account for 21% of the fund's total assets and include Taiwan chipmaker Taiwan Semiconductor Manufacturing (TSM (opens in new tab)) and Chinese e-commerce giant Alibaba Group (BABA (opens in new tab)).
JEMA's annual turnover is 40%. This means the fund turns the entire portfolio once every 2.5 years. The average market cap is $35.3 billion, considerably lower than the category average of $52.6 billion.
Actively managed ETFs haven't been immune to the volatility global stock markets have seen so far in 2022. JEMA is down around 12% for the year-to-date – though this is still better than 71% of similar emerging-markets ETFs.
Learn more about JEMA at the JPMorgan provider site. (opens in new tab)
Dimensional U.S. Equity ETF
- Assets under management: $6.0 billion
- Dividend yield: 1.1%
- Expenses: 0.11%
The Dimensional U.S. Equity ETF (DFUS (opens in new tab), $48.30) seeks to achieve long-term capital appreciation while minimizing federal income taxes on those returns. The fund takes a weighted market-capitalization approach – meaning companies with higher market caps have greater weightings in the portfolio
The actively managed ETF invests in roughly 2,000 companies. The average market cap of its holdings is $161.1 billion, considerably lower than its large-cap peers at $249.8 billion. The average stock has price-to-earnings and price-to-sales ratios of 19.0x and 2.3x, respectively, which is below the category average.
DFUS was launched as a mutual fund in September 2001. In June 2021, Dimensional Funds converted four of its largest mutual funds – including DFUS – into ETFs.
"You have this set of funds that have been managed with an eye towards tax efficiency," Dimensional co-CEO and Chief Investment Officer Gerard O'Reilly told CNBC at the time. "Part of that tax efficiency came from how we managed the dividend income, but when you look now at the additional tools that ETFs bring to the table, I think that we'll be able to achieve even higher tax efficiency ratios in those funds going forward."
In its 20 years of existence, the fund has managed an annualized total return of 9.7% through March 31. That compares to 9.9% for the Russell 3000, the ETF's benchmark. Over the past 10 years, though, DFUS has outperformed its benchmark across most time frames, including one, three, five and 10 years.
The Dimensional U.S. Equity ETF's top 10 holdings currently account for 27% of its total assets. The three biggest sectors by weight are technology (28.77%), healthcare (13.36%), and financials (12.36%). Its largest holdings are a who's who of mega-cap stocks – namely Apple (AAPL (opens in new tab)), Microsoft (MSFT (opens in new tab)) and Amazon.com (AMZN (opens in new tab)), at 6.8%, 5.0% and 3.5%, respectively. This lineup isn't changed very often, either, given the fund's very low turnover of 1%.
Learn more about DFUS at the Dimensional provider site. (opens in new tab)
Vanguard U.S. Multifactor ETF
- Assets under management: $151.4 million
- Dividend yield: 1.5%
- Expenses: 0.18%
When investors think of Vanguard ETFs, they generally don't consider the provider's actively managed ones. However, Vanguard U.S. Multifactor ETF (VFMF (opens in new tab), $101.57) is one of seven actively managed ETFs the low-cost advisor offers investors.
Vanguard launched the ETF in February 2018. Its managers use a rules-based, quantitative methodology that first removes the most volatile stocks from consideration. The remaining names are then ranked by three equally-weighted criteria: momentum and recent performance; quality and fundamentals; and value, based on prices relative to various financial metrics.
VFMF invests in stocks both large and small across a diversified group of sectors and industries. The ETF currently has around 600 holdings, and the top 10 stocks account for 10.6% of its total assets.
Given its tilt toward value stocks, sector exposure is most concentrated in financials (21.8%), followed by consumer discretionary (19.10%) and industrials (15.60%). The average market cap of the fund is $16.7 billion, considerably higher than its peers in the mid-cap blend category.
Large-cap stocks account for 35.5% of the ETF's total assets. Mid-caps have a 25.6% weighting, while small caps and micro caps make up the rest (38.9%). Top holdings at present include oil majors Chevron (CVX (opens in new tab)) and Exxon Mobil (XOM (opens in new tab)) at 1.1% apiece.
The portfolio has a turnover rate of 75%, which suggests it turns the entire portfolio once every 16 months.
Learn more about VFMF at the Vanguard provider site. (opens in new tab)
FCF International Quality ETF
- Assets under management: $65.2 million
- Dividend yield: 0.9%
- Expenses: 0.60%
The FCF International Quality ETF (TTAI (opens in new tab), $32.41) is one of the two actively managed ETFs offered by FCF Advisors, an asset management company specializing in free cash flow investment strategies. Launched in June 2017, the FCF International Quality ETF changed its name from International Free Cash Flow ETF in November 2021 amid a broader rebranding.
TTAI invests at least 80% of its assets in international stocks with strong free cash flow, which is the money left over after a company has covered the operating expenses and investments needed to grow its business.
The fund's objective is to outperform the total return of the S&P Developed ExU.S. BMI NTR Index. The portfolio managers use proprietary quantitative free cash flow analysis and fundamental analysis to construct a portfolio of high-quality international companies.
This focus on firms with strong cash flow has worked well for TTAI, with the fund outperforming both its peers in the foreign large-cap blend category and the broader index over the one-year and three-year time frames. And since its inception in June 2017, the fund has returned 7.1% on an annualized basis.
The ETF currently has 134 holdings, with the top 10 accounting for 17% of its total assets. Country exposure is fairly spread out, though most stocks come from the U.K. (12.5%) Switzerland (9.7%) and Japan (8.7%).
TTAI's three largest sectors by weight are industrials (21.5%), financials (14.1%) and technology (13.4%). Large-cap stocks account for 74.4% of total assets, with Dutch pharmaceutical firm Novo Nordisk (NVO (opens in new tab)) and Swiss drugmaker Roche (RHBBY (opens in new tab)) the two top holdings at present.
The FCF International Quality ETF has a relatively high turnover rate of 87%. However, it has received a five-star rating from Morningstar over the past three years, so it's doing something right.
Learn more about TTAI at the FCF Advisors provider site. (opens in new tab)
First Trust Long/Short Equity ETF
- Assets under management: $477.0 million
- Dividend yield: 0.0%
- Expenses: 1.36%
The First Trust Long/Short Equity ETF (FTLS (opens in new tab), $50.64) looks to generate an above-average long-term total return by investing in a portfolio of long and short equity positions. In other words, it simultaneously bets on and against stocks.
FTLS launched in September 2014 and has gathered decent total assets in its seven-plus years of existence. Its annualized total return since inception is 7.7% through Feb. 28, which is roughly 550 basis points (a basis point is one one-hundredth of a percent) less than the S&P 500 over the same period.
But before you toss FTLS in the waste bin, consider that it has a stellar reputation among its long/short peers for delivering excellent risk-adjusted returns.
Amid a volatile market environment – like the one we're currently in – demand for long/short ETFs may rise as investors worry about the direction and magnitude of stock moves. Short positions can provide downside protection against a falling market, and the First Trust Long/Short Equity ETF has a current short exposure of nearly 40% to go with a long exposure of about 96%. This has helped FTLS outperform the S&P 500 on a year-to-date basis, down 2.9% versus the broader market's 6.6% drop.
At the moment, the fund's top long positions include Dow Jones stocks Apple and Microsoft. Conversely, a few of the ETF's top "short" positions are blue chips Verizon Communications (VZ (opens in new tab)) and Walmart (WMT (opens in new tab)).
Just note that FTLS isn't cheap – and is certainly the most expensive of the actively managed ETFs featured here. Between management fees, margin and short sale fees, you're looking at about 1.36% annually for First Trust's guiding hand.
Learn more about FTLS at the First Trust provider site. (opens in new tab)
Invesco Total Return Bond ETF
- Assets under management: $989.2 million
- SEC yield: 3.1%*
- Expenses: 0.50%
The Invesco Total Return Bond ETF (GTO (opens in new tab), $51.84), which was launched in February 2016, is an actively managed intermediate-term bond fund. Its objective is to generate monthly income and, to a lesser extent, capital appreciation.
GTO does this by investing in fixed-income securities such as corporate debt of U.S. and foreign companies, Treasury bills, collateralized loan obligations (CLOs), mortgage-backed securities (MBS), and asset-backed securities (ABS). In addition, managers can invest up to a third of the fund's total assets in high-yield or junk-bond securities.
The fund is heavily weighted in financial-sector corporate bonds, which account for 27.1% of the portfolio. This is followed by U.S. government securities (16.5%), while U.S. agency securities represent 13.7% of the fund.
From a geographic perspective, the U.S. accounts for roughly three-quarters of GTO's holdings. The Cayman Islands (4.3%) and the U.K. (2.6%) come in a distant second and third.
This bond fund is able to offer typically higher yields by targeting longer-maturity issues. GTO's roughly 810 holdings have an average maturity of 11.6 years compared to the category average of 8.1 years. As a result, duration is 6.6 years, versus 6.0 for the category. (Duration is a measure of interest-rate sensitivity. Here, GTO's price will theoretically decline 6.6% for every 1-percentage-point hike in interest rates.)
However, given that a significant portion of the fund's holdings backed by the U.S. government, GTO's credit risk is fairly low. Nearly half of the portfolio boasts a Standard & Poor's credit rating of AA- or better. These are considered financially sound businesses and fully capable of repaying their debt in good order.
Morningstar has given GTO a five-star rating over the trailing three- and five-year periods.
* SEC yields reflect the interest earned after deducting fund expenses for the most recent 30-day period and are a standard measure for bond and preferred-stock funds.
Learn more about GTO at the Invesco provider site. (opens in new tab)
Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.
How Parents Can Teach Their Kids About Cryptocurrency
Starting with explaining the concept of money to begin with can help them grasp the concept of digital currencies.
By Neale Godfrey, Financial Literacy Expert • Published
How Do You Overcome Stage Fright? These 6 Tips Can Help
Many people fear public speaking more than they fear death, yet advancing professionally could depend on whether you make a good impression when you step up to the microphone.
By H. Dennis Beaver, Esq. • Published
9 Best Commodity ETFs to Buy Now
ETFs These commodity ETFs offer investors exposure to the diverse asset class, which is a helpful hedge against inflation.
By Jeff Reeves • Published
What is a Recession? 10 Facts You Need to Know
Markets Fears of an economic downturn are once again on the rise, but what is a recession, exactly? We tackle this and other questions here.
By Dan Burrows • Published
Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio
stocks The Berkshire Hathaway portfolio is a diverse set of blue chips, and increasingly, lesser-known growth bets. Here's a look at every stock picked by Warren Buffett and his lieutenants.
By Dan Burrows • Published
What Happens When the Retirement Honeymoon Phase Is Over?
In the early days, all is fun and exciting, but after a while, it may seem to some like they’ve lost as much as they’ve gained. What then?
By T. Eric Reich, CIMA®, CFP®, CLU®, ChFC® • Published
5 Top-Rated Housing Stocks With Long-Term Growth Potential
stocks Housing stocks have struggled as a red-hot market cools, but these Buy-rated picks could be worth a closer look.
By Will Ashworth • Last updated
I-Bond Rate Is 6.89% for Next Six Months
Investing for Income If you missed out on the opportunity to buy I-bonds at their recent high, don’t despair. The new rate is still good, and even has a little sweetener built in.
By David Muhlbaum • Last updated
10 Best Stocks You've Never Heard Of
stocks The market is peppered with undiscovered gems boasting stable fundamentals and cheap valuations. Here are 10 of the best stocks flying under the radar.
By Lisa Springer • Published
9 Top Energy ETFs to Buy Now
ETFs These energy funds offer exposure to oil and gas stocks, which are some of the rare outperformers in an otherwise miserable year.
By Jeff Reeves • Published