In the world of investment options, both active and passive strategies are gaining popularity among investors. Active ETFs offer several advantages over mutual funds, including transparency, tax efficiency, and the potential for better performance. According to a recent survey, more than 80% of investors prefer an active strategy in an ETF format compared to a mutual fund [65d2df6a].
Passive investing, also known as index investing or passive management, is another strategy that has gained traction in India. It involves replicating the performance of a specific market index, such as Nifty 50 or S&P BSE Sensex, by investing in a portfolio of securities that mirror the composition of the underlying index. Passive investing has become popular in India due to its simplicity, cost-effectiveness, and potential to outperform actively managed schemes over the long term [4e5bb6f8].
One of the key advantages of active ETFs is their transparency and tax efficiency. Unlike mutual funds, active ETFs disclose their holdings on a daily basis, allowing investors to see exactly what assets they own. This transparency provides investors with a clear understanding of their investments and helps them make informed decisions. Additionally, active ETFs are more tax efficient compared to mutual funds. The structure of ETFs allows for in-kind creations and redemptions, which can help minimize taxable events for shareholders [65d2df6a].
Another advantage of active ETFs is their ability to outperform passive ETFs and adapt to market fluctuations. Active ETFs are managed by professional portfolio managers who actively make investment decisions based on market conditions and opportunities. This active management can lead to better performance compared to passive ETFs that simply track an index. The ability to adapt to market fluctuations and make timely investment decisions can be particularly beneficial during periods of volatility [65d2df6a].
Passive investing through ETFs has also gained popularity in India. ETFs are investment schemes that trade on stock exchanges, similar to individual stocks. They offer investors the opportunity to gain exposure to a diversified portfolio of stocks without having to purchase each individual security. ETFs provide instant diversification, cost-effectiveness, real-time pricing, transparency, and tax efficiency. The popularity of ETFs in India has been on the rise, with their growth rate surpassing that of the overall mutual fund industry for most years. Total AUM in ETFs in India has risen to Rs 6.5 lakh crore, accounting for around 13% share of total mutual fund AUM [4e5bb6f8].
While mutual funds still retain significant assets, many investors are considering converting their assets from mutual funds to active or passive ETFs. The advantages of active and passive ETFs, such as transparency, tax efficiency, and potential for better performance, make them attractive options for investors seeking different investment strategies. However, it is important for investors to carefully evaluate the specific ETFs they are considering, as performance can vary among different funds and managers [65d2df6a] [4e5bb6f8].
ETFs are also becoming increasingly attractive to financial advisers for their younger clients. A recent report revealed that ETFs made up almost half of buy trades made through an adviser for investors aged 18 to 24, rising by 5% from the previous year. Advisers are recommending ETFs to expose young investors to a range of asset classes and develop a well-balanced investment portfolio. ETFs overall are becoming more popular among financial advisers as nearly a third of buying volumes from advisers were directed to ETFs in 2023. For investors aged 25 to 49, ETFs made up almost a quarter of the total buying volumes from advisers, at 24.7% for 2023. ETFs offer higher value for clients as they are usually low-cost compared with managed funds, providing a more accessible starting point for young investors. The transparency of ETF holdings is also appealing to younger investors as they are able to make more informed decisions about their investments and where they want their money to be used [050284e6] [65d2df6a].
Buffer ETFs have experienced rapid growth in recent years, with the U.S. market now consisting of 159 buffer ETFs with $37.99 billion in assets under management. These ETFs offer downside protection to investors, typically ranging from the first 10% to 15% of losses, while still allowing them to benefit from equity market gains. However, the protection offered by buffer ETFs comes at a cost, as investors' gains are capped when the market goes up. The suitability of buffer ETFs in a portfolio depends on the investor's goals and risk tolerance. Financial advisors should closely monitor the performance of these products and consider factors such as the series launch date and rebalancing within the right series. Buffer ETFs have higher fees compared to regular ETFs and may not provide dividends from underlying stocks. They may be best suited for nervous investors and those needing easy access to liquidity [f601d1ba].
Owners of exchange-traded funds tend to be younger than the owners of other types of mutual funds, according to data from the Investment Company Institute. The typical ETF owner was 45 in 2021, versus 51 for owners of mutual funds. As retirement approaches, many investors look at their portfolios with a fresh set of eyes and make adjustments accordingly, and ETFs may enter the picture. Retired investors can employ one of two key tacks to extract cash for living expenses from their portfolios: an income-centric approach or a total return/rebalancing approach (or a combination of the two). Index funds and ETFs lend themselves well to either. Index funds and ETFs are typically pure plays on a given asset class, making it simple to identify which assets need to be scaled back to deliver the retiree’s desired cash flow and restore the portfolio to its desired asset-allocation mix. Index funds and ETFs also stack up well in terms of limiting a retiree’s oversight obligations. Index funds and ETFs are generally pretty stable in terms of expense ratios, and they don't make active bets, reducing the need for micromanagement. Index funds and ETFs offer risk controls and tax efficiency, making them suitable for retirees. Holding more cash and bonds in retirement tends to lower a portfolio’s return potential, so keeping expenses low helps ensure that a higher share of the returns flows through to the investor. Low-cost products make sense in retirement when returns aren’t especially high to begin with. [80c56d3b]