While exchange-traded funds (ETFs) have been around for nearly three decades, active ETFs may still be in the early stages of their growth. As of December 31, 2021, there were $6.96 trillion assets under management (AUM) in passive ETFs, or 96% of total ETF AUM, and three of the top five largest ETFs — all passive — offered exposure to the S&P 500.1 While these strategies may be a low-cost way to participate in market-like returns, they don’t allow investors the opportunity to pursue better-than-market returns and may not offer protection against downside risk.
The Benefits of Active ETFs
Active management in a flexible vehicle
Active ETFs leverage the benefits of the ETF vehicle, such as intraday trading and the ability to reduce the potential for unexpectedly realizing capital gains through distributions, while identifying opportunities to pursue better-than-market outcomes for investors. Because they’re generally not beholden to an underlying index, investment managers are free to invest in their highest conviction ideas. They also have the capability to respond quickly to rapid market shifts by selecting investments that they believe will provide the most promising opportunities in the current market environment.
Active ETFs feature active management, meaning the ETF manager (or team) uses an investment strategy to select the fund’s holdings to pursue better-than-market outcomes for investors.
Passive ETFs aim to track the risk/return profile of an index. Indexes may be broad or niche (such as those offering exposure to specific countries or sectors).
Active non-transparent ETFs
Types of active ETFsWithin the active ETF category there are three main structures to consider. As shown below, they offer varying degrees of transparency and differ in the types of securities they can hold.
Active ETF Structure: Transparent
- Fully transparent
- Holdings are disclosed daily, which potentially allows for tighter bid/ask spreads compared with other active ETF structures
- Ability to invest in fixed income securities
- Ability to invest in non-U.S. securities (ADRs aren’t required by the structure)
Considerations: Additional precautions may be needed to protect investors against the potential for front-running (i.e., attempting to anticipate the moves of a large buyer or seller and trading ahead of them to make a profit).
Active ETF Structure: Semi-transparent
- Helps shield the manager’s activities by disclosing holdings monthly or quarterly
- May also disclose a mix of actual and proxy portfolio holdings on a daily basis
Considerations: Less transparency than is typical for an ETF; Currently, no ability to invest in bonds or non-U.S. equities.2
Active ETF Structure: Non-transparent (ANTs)
- Provides the most protection for intellectual capital of the strategy by disclosing holdings on a quarterly basis
Considerations: Less transparency than typical for an ETF; not widely accepted by the industry or wealth managers; Currently, no ability to invest in bonds or non-U.S. equities.2
A Signature Investment Approach, Now Available as ETFs
Capital Group recently decided to offer active ETFs, and in doing so committed to providing what it believes is the best experience for investors. The firm brings over 90 years of active management to the ETF space. The six active and transparent ETFs offer more choices for investors along with the full support of Capital Group’s extensive resources.
Designed to help strengthen the core of investors’ portfolios, the new ETFs aim to deliver solutions for some of the most common portfolio allocations. While they’re different from the American Funds, many of Capital Groups ETFs are based on seasoned strategies, and all leverage The Capital System℠, the firm’s distinct investment approach.
The firm opted for a transparent structure because it allows for the broadest investment universe to express its highest conviction ideas and gives investors the most visibility.
The new ETFs can be used together or to complement other investment vehicles, such as mutual funds or passive ETFs. A potential benefit of having active ETFs at the core is that they may help investors pursue consistency amid a variety of market environments as active managers may be better positioned to shift portfolio holdings in response to market downturns. The result could be a stronger core portfolio and possibly a smoother ride for investors while pursuing their long-term goals.
These are the funds in Capital Group’s debut suite of ETFs:
Combines growth and income to potentially provide a smooth ride
How it fits: Core U.S. equity allocation
- U.S. equity-focused: A portfolio that can serve as a complement to an S&P 500 index fund. Like all Capital Group funds, it utilizes The Capital System, which is designed to help portfolios participate in strong market environments and dampen volatility in challenging ones.
- Focus on fundamentals: Careful company selection, informed by fundamental research, helps identify companies with attractive long-term prospects for growth and/or dividends.
- Balance: Blends many blue chip dividend-paying companies with non-dividend-payers that show attractive growth potential.
Seeks growth by investing in a broad group of companies that have potential for capital appreciation
How it fits: U.S. growth allocation
- Growth: A broad strategy that seeks growth of capital as its objective rather than its investment style, meaning that while the fund will predominantly invest in larger, faster growing U.S. companies, managers have flexibility across different geographies and investment approaches in search of capital appreciation.
- Flexible: The fund takes a company-by-company approach, investing in traditional growth companies as well as cyclicals and turnaround situations in its quest for capital appreciation.
- Consistent: The fund takes a long-term perspective, which allows for a patient approach to growth investing.
How it fits: Core U.S. value growth allocation
- Value: Dividends can offer a steady stream of returns to investors and this fund values companies that are capable of paying dividends across a variety of market and economic environments.
- Income: Seeks to produce consistent income that exceeds the average yield of the S&P 500 by focusing on companies that pay dividends or have the potential to pay dividends.
- Quality: The fund primarily invests in well-established U.S. companies with a history of financial strength and regular dividend payments.
Boots-on-the-ground investing for international growth
How it fits: Core international allocation
- Opportunistic: Explore opportunities outside the U.S. — including emerging markets — with a company-by-company-focused strategy that seeks long-term growth of capital.
- Companies, not countries: The fund aims to pursue returns primarily through company selection, not regional or sector selection.
- Consistency: A core, non-U.S. fund that seeks to invest in promising international companies for long-term growth of capital, leveraging Capital Group’s distinct approach to investing.
Travels anywhere for growth
How it fits: Growth allocation
- Broad: Takes a flexible geographic approach in its search for fundamentally strong, high-potential companies anywhere in the world.
- Company focused: Takes a bottom-up approach, analyzing all aspects of companies with significant growth potential, including where they do business, their position in their industry, their products and the health of their supply chains.
- Supported by extensive global resources: Leveraging a deep global research network, the fund invests with the view that as global markets and economies become more connected, an informed perspective is increasingly important.
A balanced approach to preserving capital and pursuing income while seeking total return
How it fits: Single solution core-plus-income bond allocation
- Core: Seeking downside protection alongside a resilient income stream.
- Diversification: A broadly diversified portfolio with multiple sources of active return.
- Income: Pursues a resilient income stream over a full market cycle through sector diversification including high-yield corporates, emerging markets and securitized debt.
Designed to help investors pursue their long-term goals
Capital Group focuses on a long-term, objective-based approach to investing, and a belief that the core of investors’ portfolios should align to their goals and promote resilience during volatility. The new ETFs are objective-oriented funds that seek better investment outcomes and aim to provide the flexibility to pursue attractive investments in a variety of markets.
1 Morningstar Direct, as of 12/31/21
2 To invest in non-U.S. equities, semi- and non-transparent ETFs must use American Depository Receipts (ADRs), which may have less liquidity or could be subject to greater price fluctuations than the non-U.S. security itself.
3 Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be heightened in connection with investments in developing countries.
4 The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. The use of derivatives involves a variety of risks, which may be different from, or greater than, the risks associated with investing in traditional cash securities, such as stocks and bonds. Higher yielding, higher risk bonds can fluctuate in price more than investment-grade bonds, so investors should maintain a long-term perspective.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Capital Group exchange-traded funds (ETFs) are actively managed and do not seek to replicate a specific index. ETFs are bought and sold through an exchange at the then current market price, not net asset value (NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV when traded on an exchange. Brokerage commissions will reduce returns. There can be no guarantee that an active market for ETFs will develop or be maintained, or that the ETF’s listing will continue or remain unchanged.
As nondiversified funds, Capital Group ETFs have the ability to invest a larger percentage of assets in securities of individual issuers than a diversified fund. As a result, a single issuer could adversely affect a fund’s results more than if the fund invested a smaller percentage of assets in securities of that issuer. See the applicable prospectus for details.
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