Pay Fahlbusch is sales manager at Axa IM. Getty Images/BlackJack3D, Nastassia Samal
Active ETFs are increasingly establishing themselves on the market. Pay Fahlbusch, head of sales at Axa Investment Managers, explains what the difference is to passive ETFs.
One difference: In contrast to passive ETFs, fund management can intervene with active ETFs.
When you think of passive investing, ETFs are probably the first thing that comes to mind. The index funds usually replicate a specific index, which means that no fund management makes active investment decisions. “With a passive ETF that tracks the S&P 500, for example, the index is created by the index provider, in this case Standard & Poor’s. This is then replicated one-to-one by the fund provider,” explains Pay Fahlbusch, ETF sales manager at the asset manager Axa Investment Managers (IM).
Definition: What are ETFs?
Exchange Traded Funds, or ETFs for short, are index funds that replicate a stock, bond or raw material index and are traded on the stock exchange.
Replicating the index can be done in two ways: physical or synthetic. While physical ETFs invest in the securities that the index contains, synthetic ETFs replicate the index via swap transactions. For this purpose, the ETF provider concludes a contract with the swap partner – which is usually the financial institution. The latter pays the index return including the dividend in exchange for a fee.
Active ETFs have also been establishing themselves on the market for some time now. Business Insider asked the ETF expert how the active products work and when they can be worthwhile for investors.
“With an active ETF, investors still have the regulatory cover. The ETF can be traded on every trading day, is transparent and cost-effective. The difference: The model portfolio is not created by the index provider, but by the fund provider,” says Fahlbusch.
When active ETFs are worthwhile
“The advantage of an active ETF is that if something critical comes to light, for example with regard to ESG, the fund management can intervene,” explains Fahlbusch. Active ETFs are particularly good for investors who might want someone to look at the allocation. “Even if a company gets into difficulties in the bond sector, portfolio management does not have to risk bankruptcy and can intervene. This means it can act on an ad hoc basis, independent of the regular adjustments – which often take place on a monthly or quarterly basis.”
Bonds
Bonds are a form of debt. They are issued by companies, governments or other organizations to raise capital. Anyone who buys a bond lends money to the issuer, i.e. the issuer of the securities, for a set period of time. In return, the investor receives regular interest payments. At the end of the term, the nominal amount of the bond is repaid.
Bonds are generally considered to be less risky than stocks. However, the risk depends on the issuer. Government bonds, especially from stable countries, are considered very safe. Corporate bonds could be riskier. This often depends on the creditworthiness of the issuer.