Active mutual funds faced their first stern challenge when indexing started gaining ground and investors started putting money into passive strategies through index ETFs and index mutual funds.
A lot of the benefits that Active ETFs bring to investors are inherent to the ETF structure which serves as a much more efficient conduit for an active strategy for the following reasons:
Naturally, Active ETFs have a higher expense ratio than their indexing counterparts due to higher trading costs, but they Index ETFs do not compete directly with Active ETFs.
The ability to have in-kind creation and redemption allows investors to avoid adverse tax consequences that are experienced by mutual funds which involve cash transactions when units are redeemed.
ETFs have always been known for the enhanced transparency that they provide to investors and coming through 2008/2009, that transparency and clarity in what their fund holds is more precious to investors than ever.
Mutual funds usually make quarterly disclosures on their holdings. A quarter is a long time in markets these days – if you were talking about a quarter in late 2008 or early 2009, you could have seen the Dow drop 5,000 points and still not know what was happening in your mutual fund.
Unlike mutual funds, investors in Active ETFs or for that matter any ETF can get in and out of their investment whenever they like and at any time during the trading day. This provides investors with a much more flexible product that they can trade to their liking.
In times of market stress, this liquidity can become crucial – even if there is hardly any volume in the market, the market makers for ETFs are obliged to provide a bid or ask price to investors, albeit with a higher spread.