What role can active investing play in your portfolio? Many investors rely on passive funds, with those strategies often playing the role of core allocations. That offers some notable appeal, given how large the leading passive funds are and how well they have done. Active funds and ETFs, however, can offer some particularly helpful attributes. While at first glance, they may appear mainly as a way to get more risk-on exposure, active investing can appeal to risk-averse managers, too.
What, specifically, does active investing entail? It can help to revisit what that term really means. With active investing, managers retain the flexibility to pick and choose among securities. Rather than tracking all of the stocks in an index, active managers can lean into those that appear to hold the greatest promise while avoiding the ones with the least. That can help if a manager believes a popular index fund may have too large an allocation to a specific firm, for example.
With many active managers working to outperform popular indexes, one might imagine those strategies appealing to the more risk-minded. Active investing can also help “mitigate” risk. As mentioned above, active managers can avoid concentration risk in passive, index-tracking funds. Often, those managers can apply fundamental research and get a deeper view of a firm’s outlook.
Perhaps most importantly, however, active managers can adapt to events. Should a major earnings surprise distort the outlook of an entire sector, active funds can adjust. Other global factors can impact domestic markets, whether that be an energy crisis, geopolitical risks, or even a pandemic. Active management can make adjustments to continue to perform.
Certain active ETFs can make them an option for either a core or satellite allocation. Advisors may, therefore, consider active investing for both new, risk-seeking investors and retirement-age, risk-averse clients.