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Active ETFs: What You Should Know

At first glance, actively managed exchange-traded funds (ETFs) might seem like a contradiction. After all, most ETFs are considered passive investments because they’re designed to replicate the performance of specific market indexes rather than outperform them.

Active ETFs, on the other hand, rely on fund managers to select assets in response to changing market conditions. Broadly speaking, their goal is to deliver returns in excess of whatever index they use to benchmark their performance.

While actively managed ETFs are growing in popularity—with record inflows of $27.5 billion in 2018—they currently represent only about 2% of the $3.4 trillion U.S. ETF market. And most active ETF money is in ultra-short bond funds.

“That’s because, with short-term interest rates so low, some fixed income fund managers are assuming a bit more risk as they strive to generate additional returns,” says Michael Iachini, vice president and head of manager research at Charles Schwab Investment Advisory. Should the current bull market begin to lose strength, equity fund managers may follow suit.

But while better returns might sound appealing, there are other aspects to consider. “These funds likely will have fees that fall somewhere between those of a garden-variety index fund and those of an actively managed mutual fund,” Michael says. “And additional fees come at a cost to returns.”

Risk is another factor. “In pursuit of greater returns, active ETF managers must, by definition, take on additional risk,” Michael says, “so investors will want to take that into consideration, as well, before seeking to beat the market.”

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Charles Schwab Investment Advisory, Inc. (“CSIA”) is an affiliate of Charles Schwab & Co., Inc. (“Schwab”).

Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. ETF shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Investing involves risk, including loss of principal.

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