What are active ETFs?
Fund-based investing typically follows two main approaches: active management and passive management. In active management, a fund manager makes deliberate choices about which stocks or securities to buy, hold or sell based on their analysis of market conditions and economic trends. Passive management, by contrast, aims to replicate the performance of a market index; many passive exchange-traded funds (ETFs) track well-known indices such as the S&P 500 or the S&P/TSX 60.
ETFs are commonly associated with passive, index-based investing, but actively managed ETFs have been growing in prominence. If U.S. trends are any indication, active ETFs are gaining traction and could become more common in other markets, including Canada.
For example, in the United States, roughly 30% of ETF inflows in the first half of 2023 went to active ETFs—more than double the share for all of 2022. A decade earlier, active strategies made up only about 2.3% of ETF inflows. During the first half of 2023, passive ETFs grew organically by around 3%, while active ETFs expanded at a faster pace—about 14%. Active ETFs have also seen rapid growth in other regions; in parts of Asia they experienced very strong gains in the same period.
These figures show growing investor interest in active ETFs. The key questions for investors are: how do active ETFs operate, are they a suitable fit for your goals, and how can you buy them in Canada, including in registered accounts such as an RRSP?
The benefits of active ETFs
Both active and passive management styles offer advantages, and many investors use a combination of the two. If active ETFs match your objectives, time horizon and risk tolerance, they can provide several potential benefits:
- Targeted strategies: Active ETFs can provide straightforward access to a specific sector, theme or investment approach. While passive ETFs can also offer exposure, active managers may pursue strategies that aim to beat a sector benchmark rather than simply track it.
- Potential to outperform: Passive ETFs typically charge lower fees and deliver market returns, but some investors seek above-market performance. Active ETFs are structured to try to outperform their benchmarks, accepting the higher management costs that often accompany active oversight.
- Intraday trading flexibility: Like all ETFs, active ETFs trade on exchanges, allowing investors to buy or sell shares during market hours. That intraday liquidity and the ability to see trade prices at the time of order can be an advantage over mutual funds, which trade only at end-of-day net asset values.
- Active downside management: Active managers can take defensive actions—such as raising cash positions or increasing fixed-income exposure—if they anticipate a market pullback. This flexibility can help reduce losses during sharp market declines in ways that a passive index-following fund cannot.
Because of these features, active ETFs can serve as either a core holding or a complementary part of a diversified portfolio. When held inside registered accounts like an RRSP, investments can grow tax-deferred. Some investors use passive ETFs as the long-term “core” and add active ETFs as the “explore” component to pursue specific sectors or potential excess returns.
How to buy Fidelity Active ETFs
If you decide active ETFs suit your portfolio, you can access Fidelity Active ETFs in two main ways:
- Through a financial advisor: An advisor can add Fidelity ETFs to a client’s portfolio, advise on whether active strategies fit your goals, recommend which funds to consider and suggest appropriate allocation sizes.
- Via an online brokerage: Self-directed investors can buy Fidelity ETFs through most online brokerages. Simply search for the ETF ticker symbol in your brokerage account and place an order during trading hours, as you would with a stock.
Investing is not one size fits all. Some investors prefer an exclusively passive strategy, others opt for active approaches, and many combine both to balance cost, diversification and the pursuit of potential outperformance.
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This post was produced with client involvement. It is informational and may feature a client’s product or service. Content was written, edited and produced by MoneySense with contributions from assigned freelance writers and approved by the client.
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Read more about investing:
- How many ETFs can Canadian investors own?
- What investments can I put in my TFSA?
- Building a “core and explore” portfolio with an all-in-one ETF
- What’s under the hood? A look at what goes into all-in-one ETFs—and how they work