Six ETF Myths Debunked

Exchange-traded funds (ETFs) have become a cornerstone of the investment landscape. Unfortunately, however, there are still a number of misconceptions about these products. We believe it’s important to dispel these myths as they potentially could lead some investors to miss valuable additions to their portfolios.

With this in mind, here are six of the most common myths regarding ETFs:

When they were first developed, ETFs were strictly passive vehicles. Increasingly, though, more ETF offerings are actively managed, and there are now a variety of strategies available to investors across equity and fixed income asset classes.

We believe that the level of risk depends on the underlying investments and not whether an ETF is passively or actively managed. That said, most active managers have the flexibility to conduct research and attempt to anticipate risks. Applying their professional experience and judgment when making security selections, active managers look for specific sectors or companies with greater upside potential and seek to avoid those with inappropriate downside risk. This approach is not possible with passive ETFs, which seek to track the stocks or bonds held in an index.

While it is true that not every fund manager can outperform their benchmark, some do. While all active managers strive to outperform their benchmarks, we believe those with global resources and research platforms may have an advantage leveraging their capabilities and experience. At the same time, economies of scale can help to keep fees and expenses in check.

Although they can be bought and sold throughout the day without trading frequency limitations, ETFs are often intended for use over longer-term investment horizons. With fewer operational expenses than some other financial instruments, ETFs can be a cost-effective way to maintain exposure to various investment strategies over longer periods.

Full daily transparency was originally viewed as necessary for an efficient ETF-trading process. However, the industry has evolved, and there are now several ways for ETF strategies to operate efficiently while maintaining a level of trading confidentiality. For some ETFs, shielding their investment-related intellectual property can be important to prevent outside investors and competitors from using the information in a way that may be detrimental to performance. However, not every investment strategy requires such shielding. For example, because of the way bond markets work, it’s unlikely that competitors can gain a detrimental trading advantage by knowing the holdings of certain fixed income strategies.

An ETF’s daily trading volume is not necessarily an indication of how liquid it is. Instead, it may be more informative to look to an ETF’s underlying holdings when assessing liquidity. With holdings based in highly liquid markets, such as U.S. large-cap stocks, ETFs with low historical daily trading volumes can accommodate significantly higher volumes without causing major price swings. As a result, if the underlying holdings are highly liquid, the ETF should be liquid, as well.

Contrary to the myths, active ETFs can play an important role in investor portfolios. Supported by fundamental research and managed by experienced professionals with a focus on security selection and careful attention to risk, we believe active ETFs could provide investors the opportunity for enhanced gains and the potential for appropriate downside risk management.

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.