Why Would You Need Or Want An Active ETF?

We pulled a relatively obscure category for today’s Trackstar top five to not only showcase the wide range of sectors we track, but to reinforce the point that you can find an ETF to invest in just about any space. 

Agricultural commodities—you got it. 

While these most obvious ticker symbols don’t generate the level of investor search interest Apple (AAPL), Tesla (TSLA) and Nvidia (NVDA) command, they’re getting hits. 

ETFs such as WEAT, CORN and CANE are about as straightforward as they come. They’re passive ETFs tracking market indices that give investors exposure to the price of wheat, corn and sugar futures in their investment account. If you put money in one of these or similar ETFs you have a very specific purpose in mind. 

However, DIY and even some professional investors might not be quite so clear on what they’re doing when faced with active ETFs. 

This is one reason why—in The Juice’s ongoing series on ETF investing—we argue for keeping it simple as the default approach: 

Accessible investing isn’t necessarily about myriad, fancy, flashy and seemingly lucrative options. To us, access means the ability to participate in long-term market upside without prohibitive commissions and fees. 

And that’s SPY and QQQ …

Invesco, the firms that offers QQQ, tells us not only that a $10,000 investment in the ETF 10 years ago would be worth about $56,788 today, but that, over the last year, QQQ has produced 1.67X the returns of SPY (+32.86% versus 19.56%). 

SPY, managed by State Street Global Advisors, focuses its marketing on the idea that an investment in the ETF gives investors access to the broad U.S. economy. It also points out that information technology stocks compose nearly 28% of SPY’s holdings. 

No doubt, an investment in SPY gives you exposure to many of the same stocks as tech-heavy QQQ. We’re talking about Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Tesla (TSLA) and Nvidia (NVDA).

Like so much else in life—and investing—there’s nuance in that synopsis of the two most popular ETFs tracking the broad stock market: the SPDR S&P 500 ETF (SPY) and the Invesco QQQ ETF (QQQ).

You might favor SPY and QQQ because they’re overexposed to the market’s big and—as of late—top-performing names. However, the investor sitting next to you might shy away from or own comparatively less of SPY and QQQ because they’re overexposed to the market’s top names. This type of investor is probably worried about concentration risk. 

An actively-managed ETF isn’t held to owning the same stocks in the same proportion as a benchmark index. They can invest around a specific theme or merely screen the broad market or specific sectors such as tech in an effort to only own the best of the bunch based on circumstances at a company or market conditions. 

Your level of concern over concentration risk likely varies on the basis of your goals and unique personal financial situation. 

However, one thing is certain: If you’re a long-term investor, the last thing you want to do is trade in and out of ETFs based on what’s happening today. In doing so, you could miss out on the superior long-term returns of the broad market—as reflected in SPY and QQQ. Or if you’re in, let’s say a solid dividend ETF, you could miss out on the power and glory of long-term dividend growth investing. 

No doubt, active ETFs are having their moment. Not only is interest through the roof, but they’re performing well against their passive counterparts. 

• During the first half of this year, 57% of active strategies beat their equivalent passive strategy, compared to just 43%, as of December 2022. 

However, over the long-term passive strategies still come out ahead:

• For example, in the decade leading up to June 2023, just 10.5% of actively-managed, large cap domestic ETFs outperformed their passive peers. 
• Over the last five years, the typical passive large cap ETF returned 8.8% annualized versus 7.1% for comparable active ETFs. 

The Bottom Line: Nuance. It often gets lost in the headlines. While the buzz active ETFs have created deserves your attention, it’s important to not only consider near- or long-term performance, but your appetite as an investor. Particularly your appetite for risk and what’s on your plate goalwise. 

If you have a lengthy time horizon and you’re comfortable being super long big tech, you’ll go one way. If you need your money tomorrow, you might take less risk and accept less reward to preserve capital. There are passive and active ETFs that can help you do that. 

As we said, our ETF coverage is ongoing. Because it’s such an important part of the market for individual investors—and because things can change on a dime (don’t look now, but NVDA is down roughly 9% over the last month!)— we’ll be here to guide you through and make sense of the mess.

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