Bottom Line: These combine the advantages of an ETF and a mutual fund
The vast majority of exchange-traded funds (ETFs) are “passively” managed—their portfolios are designed to track the ups and downs of indexes such as the Standard & Poor’s 500 stock index and many others. But a growing number of ETFs—more than 220 so far—are actively managed, meaning that managers decide which investments to buy and sell.
Those ETFs tend to be cheaper and more tax-efficient for investors than similar mutual funds, although not as cheap as passively managed ETFs. And unlike mutual funds, all ETFs trade on markets as individual stocks do, so they can be bought and sold anytime the markets are open. However, unlike many mutual funds, active ETFs are relatively new, so they don’t have long-term performance records by which you can judge them. Until they do have longer records, it is best to choose active ETFs that offer unique and compelling strategies unavailable in mutual funds.
Two actively managed ETFs with intriguing strategies…
Pimco Active Bond ETF (BOND) has the flexibility to invest in fixed-income investments anywhere in the world with any maturity date and any level of credit quality. And unlike many bond mutual funds, this ETF focuses primarily on providing steady income rather than capital appreciation. Its five-year annualized performance of 2.1% as of April 15, 2018, beats the 1.6% annualized gains of the Bloomberg Barclays US Aggregate Bond Index. Recent yield: 3.1%.
TrimTabs All Cap US Free-Cash-Flow ETF (TTAC). This fund invests in stocks of companies that have strong free cash flow and are aggressively buying back their shares, shrinking the number of shares floating on the open market. These two factors have historically led to a rise in share prices for such companies. The fund, launched in September 2016, returned 24.3% over the past year versus 16.3% for the Russell 3000, which tracks nearly the entire US stock market.