Are ETFs active or passive?

Are ETFs active or passive?

ETFs can be either active or passive. Here's a brief explanation of each type:

Passive ETFs:

  • Objective: Aim to replicate the performance of a specific index, such as the S&P 500, NASDAQ-100, or another benchmark.
  • Management Style: Passively managed, meaning they follow a predefined set of rules or an index, with minimal buying and selling by the fund manager.
  • Cost: They typically have lower fees than active ETFs because they require less frequent trading and less intensive management.
  • Example: SPDR S&P 500 ETF (SPY) tracks the S&P 500 index.

Active ETFs:

  • Objective: Aim to outperform a specific benchmark or achieve a particular investment objective through active management.
  • Management Style: Actively managed, meaning the fund manager makes decisions about buying and selling securities based on research, analysis, and market conditions.
  • Cost: Generally, they have higher fees than passive ETFs because they involve more frequent trading and active management by professional fund managers.
  • Example: ARK Innovation ETF (ARKK), which focuses on companies involved in disruptive innovation.

Summary:

  • Passive ETFs: Track an index, lower fees, minimal trading.
  • Active ETFs: Aim to outperform higher fees, active trading, and management.

When choosing between active and passive ETFs, consider your investment goals, risk tolerance, and preference for management style.


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