Active ETFs: A Flexible Strategy for Driving Long-Term Growth

A portfolio of active ETFs has two levels of flexibility. The investor has the flexibility to adjust their allocations across the funds at any time during the trading day. Additionally, the fund managers have the ability to stay agile, making adjustments in response to market volatility, economic changes, or shifts in the investment environment. By offering this level of flexibility, active ETFs can align closely with long-term objectives, making them an appealing option for those planning for the future.

One of the important benefits of active ETFs is that fund managers can adjust holdings in response to changes in the investment environment. For example, during significant events, such as the current trade wars, managers can assess the impact and respond accordingly.

If tariffs target specific companies, countries or industries, managers can shift the fund’s exposure away from affected holdings, sectors or regions, reducing risk and protecting the portfolio from potential losses. In contrast, passive funds tend to remain unchanged in response to such events until the next scheduled index rebalance, potentially exposing investors to greater risk.

Further, active fund managers who invest globally in either stocks or bonds have the flexibility to adjust their portfolio’s geographic allocations based on market conditions or their outlooks on specific countries or regions. For instance, if a fund manager believes that a particular country’s economy is likely to outperform relative to other markets, they may increase their investment in that country.

Alternatively, if a country faces economic uncertainty or political unrest,fund managers may reduce exposure to minimize risk. This ability to dynamically allocate assets based on market conditions differs greatly from passive funds, which follow a prescribed geographic allocation, determined by the index they follow, regardless of shifting global dynamics.

Finally, active ETFs also provide fund managers with the opportunity to identify investment opportunities that may be overlooked or mispriced by the broader market. Fund managers conduct in-depth research and analysis to uncover undervalued stocks and bonds. For example, a company’s stock might be underappreciated due to short-term challenges but have strong long-term growth potential. A corporate bond might offer high yields but for the wrong reason – the issuer might have a weak financial position and pose significant credit or default risk. By using research to look deeper, active managers may help the portfolio generate superior returns.

Passive strategies, on the other hand, typically aim to track a broad market index and might not be able to capitalize on these specific opportunities. The flexibility to pick individual securities gives active ETFs a unique ability to identify and take advantage of market inefficiencies.

The advantages of active ETFs — flexibility in responding to market shifts, adjusting exposures, and uncovering mispriced opportunities – make them a powerful tool for investors looking to maximize returns and manage risk effectively in a changing financial landscape.

Capital Group offers four actively managed ETFs on the TSX – Capital Group Global Equity Select ETF (Canada) (CAPG), Capital Group International Equity Select ETF (Canada) (CAPI), Capital Group Multi-Sector Income Select ETF (Canada) (CAPM) and Capital Group World Bond Select ETFTM (Canada) (CAPW).