Active ETF 101: The Merits Behind the Active ETF Boom

Active ETFs seem to be everywhere right now following a big boom over the last few years. While active ETF strategies have been available for many years, the so-called ETF rule in 2019 kickstarted ETF development. That said, even with active ETFs growing in popularity, many investors may still have questions not only about active ETFs, but also ETFs and active investing individually.

See more: Active ETFs Nearing 10% of Total ETF Market Share

To start, then, consider the ETF. ETFs of all kinds have exploded in popularity, but the average mutual fund investor may still not fully understand the wrapper. Investors can invest in a strategy in all kinds of formats, but in this case, funds often arrive in mutual fund or ETF flavor.

Active ETF vs. Mutual Fund Approaches

ETFs provide more transparent information than mutual funds do, reporting their moves each day. ETFs are also listed on exchanges and tradeable themselves. Perhaps most impactful is that ETFs provide fewer taxable events than mutual funds.

That owes to ETFs’ use of the “creation / redemption” model. Unique to ETFs, this process involves the ETF sponsor working with authorized participants, or APs, to craft shares out of stocks. The AP delivers underlying securities to the ETF sponsor, who provides the shares to the AP in turn to then be traded between buyers and sellers. As demand rises, more shares can also be provided, offering significant liquidity.