What are active ETFs?

Since smartphones became a must-have device less than two decades ago, we live in a time when products are expected to do more than one thing well. The investment industry has watched and learned from this trend. Active ETFs, one of the newest innovations, give you a different bundle of investment benefits than a traditional mutual fund or traditional passive ETF.

Diversification and professional management

Start with basic diversification

ETFs (exchange-traded funds) are a new generation of investment. ETFs invest in a portfolio of securities, such as stocks and bonds, providing diversification and professional management.

Put it on an exchange

ETFs bundle a group of stocks to provide investment diversification like a mutual fund, but they package it with other features that investors want.

One of the big structural differences is that an ETF trades on the stock exchange, just like a stock. As stock prices change throughout the day, so does the price of the ETF. This gives you and other investors greater flexibility about when to trade shares than with a mutual fund, which prices only once per day at the end of trading. It also gives you clear visibility of the price when you buy or sell. With a mutual fund, the price is unknown when you put in a buy or a sell order. You only learn the actual price after 4:00 p.m. of the day you make the trade.

With this structure, ETFs offer a number of advantages over traditional mutual funds:

  • Fully invested: ETFs rely less on cash for creating or redeeming shares the way that many mutual funds do, which allows ETFs to offer potentially greater exposure to stocks.
  • Lower costs: ETFs can offer reduced costs to investors compared with mutual funds; they generally have a unitary fee structure for managing the portfolio.
  • Intraday pricing: ETF shares trade throughout the day, offering convenient buying and selling.

Add an active strategy

In recent years, ETFs took another step forward with active ETFs, which offer active stock selection by experienced portfolio managers in an ETF structure.

Active ETFs are different from traditional passive ETFs. Active ETFs try to outperform indexes rather than keep close to index performance, like a passive strategy. With experienced managers pursuing a strategy, they try to capture more of the upside in stock performance and less of the downside than a passive ETF. Portfolio managers research companies, industry sectors, and markets to choose stocks they believe can outperform indexes like the S&P 500 Index or the Russell 2000 Index.

Initially, active strategies and ETFs didn’t fit together. The early ETFs were transparent, allowing the public to know the stocks in their portfolios each day. Active managers do not want to give away the stock selections that they are paid to make, which is the value proposition of active management. Many active managers avoided offering ETFs that required daily disclosure of its full holdings, which could allow other investors to mimic their trades, and maybe undermine their returns.

A different type of ETF, called a semi-transparent ETF, is an ETF structure more to the liking of active managers. A semi-transparent ETF does not require daily disclosure of all of a manager’s stock selections. Semi-transparent ETFs come in different models. One model discloses a daily tracking basket that is designed to represent the real portfolio’s daily performance. The actual daily holdings in the ETF and their weighting — how big each stock is in the portfolio — are protected from traders who might have a front-running trading strategy.

Active ETFs offer diversification, intraday trading, cost and tax advantages, and active stock picking, including these benefits:

  • Potential for outperformance: Active strategies pursue above-benchmark returns through investment research and portfolio positioning.
  • Active risk management: Proactive research helps to identify better risk-reward potential and seeks to reduce unintended risk.
  • Professional oversight: Experienced portfolio managers help active ETFs balance risk and return while delivering the ETF’s structural benefits.
Active ETFs may be one of the most cost-effective ways for you to take advantage of active management strategies. Explore some of the possibilities in active ETFs at Putnam.com.

Disclosure:

These ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:

You may have to pay more money to trade the ETF's shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.

The price you pay to buy ETF shares on an exchange may not match the value of the ETF's portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared with other ETFs because it provides less information to traders.

These additional risks may be even greater in bad or uncertain market conditions.

The ETF will publish on its website each day a "Tracking Basket" designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF's holdings, it is not the ETF's actual portfolio.

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF's performance. If other traders are able to copy or predict the ETF's investment strategy, however, this may hurt the ETF's performance.

For additional information regarding the unique attributes and risks of the ETF, see the disclosure below and the Principal Investment Risks section of the prospectus.

Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV, and are not individually redeemed from the fund. Brokerage commissions will reduce returns.

The funds have limited public-trading history and will operate differently from other actively managed ETFs that publish their portfolio holdings on a daily basis.

Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.

Disclosure:

These ETFs are different from traditional ETFs. Traditional ETFs tell the public what assets they hold each day. This ETF will not. This may create additional risks for your investment. For example:

You may have to pay more money to trade the ETF's shares. This ETF will provide less information to traders, who tend to charge more for trades when they have less information.

The price you pay to buy ETF shares on an exchange may not match the value of the ETF's portfolio. The same is true when you sell shares. These price differences may be greater for this ETF compared with other ETFs because it provides less information to traders.

These additional risks may be even greater in bad or uncertain market conditions.

The ETF will publish on its website each day a "Tracking Basket" designed to help trading in shares of the ETF. While the Tracking Basket includes some of the ETF's holdings, it is not the ETF's actual portfolio.

The differences between this ETF and other ETFs may also have advantages. By keeping certain information about the ETF secret, this ETF may face less risk that other traders can predict or copy its investment strategy. This may improve the ETF's performance. If other traders are able to copy or predict the ETF's investment strategy, however, this may hurt the ETF's performance.

For additional information regarding the unique attributes and risks of the ETF, see the disclosure below and the Principal Investment Risks section of the prospectus.

Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV, and are not individually redeemed from the fund. Brokerage commissions will reduce returns.

The funds have limited public-trading history and will operate differently from other actively managed ETFs that publish their portfolio holdings on a daily basis.

Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.