Like the Mutual Fund? Meet the ETF
Kiplinger's Personal Finance|November 2021
Some portfolio managers are bringing their star power to exchange-traded versions of their funds.
NELLIE S. HUANG

EXCHANGE-TRADED FUNDS are practically synonymous with index investing. But lately, actively managed ETFs have been flooding the market. Since the start of 2021, the “overwhelming” majority of new ETF launches have been actively managed, says Todd Rosenbluth, S&P Global Research head of ETF and mutual fund research. Many of these ETFs follow the same strategies—some even share the same names—of well-known, top-rated actively managed mutual funds.

Some of these new ETF replicas could be worthy choices for your portfolio. But first, it’s important to understand how they work (they vary a bit from how index-based ETFs operate), as well as how they may differ from their mutual fund counterparts.

Of course, active ETFs aren’t totally new. The first one launched in 2008, according to Morningstar. Pimco Total Return Bond ETF, now called Pimco Active Bond, arrived in early 2012. And Ark Investments opened the first of its seven actively managed ETFs in 2014, including one of our favorites, Ark Innovation, a member of our Kiplinger ETF 20 list.

But some of the newest active funds are a different breed. Instead of reporting detailed portfolio holdings daily, certain funds, dubbed semitransparent or non-transparent ETFs, operate under a rule adopted in 2019 that allows them to report portfolio holdings quarterly. That enables active fund managers to implement their strategies in an ETF structure without “tipping their hand” on their portfolio moves, says Ben Johnson, Morningstar’s director of global ETF research. It paved the way for traditional fund firms, including Fidelity, T. Rowe Price, and Putnam Investments, to launch active ETFs that mimic the strategies of their star mutual funds.

Price launched four active ETFs last summer. Each is “patterned after” a well-known Price mutual fund, such as Dividend Growth and Equity Income, says Scott Livingston, head of Price’s ETF strategy and capital markets global team. Fidelity has rolled out nine actively managed stock and bond ETFs since mid-2020. Many are “clone-ish” versions of the firm’s best-known active mutual funds, including Fidelity Blue Chip Growth, Magellan and New Millennium, says Greg Friedman, head of ETF management and strategy for Fidelity.

Overall, the influx of active non-transparent ETFs means more choices for investors, which is a good thing. But although these ETFs offer many positives, there are also some caveats to understand before you jump in.

LOWER FEES, LIMITED HOLDINGS

Nontransparent ETFs charge lower expense ratios than their mutual fund originals—between 0.20 and 0.40 percentage points less, on average. But all of the typical advantages of traditional ETFs apply to these new active ETFs, too. All you need is enough cash to cover the price of a single share and a brokerage account to invest in one, and you can execute your trade at any time of the day. And like all ETFs, nontransparent ETFs are inherently more tax-efficient than their mutual fund archetypes. “It’s a great option for folks looking for tax efficiency,” says Price’s Livingston.

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