Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 292

Active ETFs are a great Aussie invention

Active Exchange Traded Funds (ETFs) are a great Aussie invention for investors as well as a global-leading product. They combine the benefits of active fund management (the ‘active’ part) with the convenience of being traded like a share on the stock market (the ‘ETF’ part).

Australia is one of only two countries (Canada is the other) in the world that allow Active ETFs in the way we define it. In the US, they are limited to 'smart beta' funds as so-called Active ETFs in the US must provide daily disclosure of their portfolio and active managers are unwilling to disclose their stock selections daily. Authorities in Australia gave approval to Magellan initially for quarterly portfolio disclosure and that was the start of the Australian Active ETF market.

Some misunderstandings of Active ETFs

Much has been written about ETF risks and definitions. For example, Roger Montgomery wrote in a note to clients, “Is this another diversification trap”, in November 2018 that

“investors who think ETFs offer safety through diversification are no more protected than those who invested in mortgage-backed collateralised debt obligations (CDOs) before the global financial crisis.”

I realise this is meant to refer to the pitfalls of market cap index investing and its concentration in certain sectors but it fuels the confusion that ETFs themselves are bad by associating ETFs overwhelmingly with passive investing.

Arian Neiron from Van Eck (an ETF provider) wrote in July 2018 that, “Active ETFs are not ETFs” because they don’t track an index, don’t publish their holdings and have higher fees than passive index ETFs. This implies that passive index ETFs somehow have the ‘right' to be called ETFs but Active ETFs don’t. The same logic would suggest that a passive managed fund is not a managed fund as the vast majority of managed funds are active funds. Neither is true.

ETFs have benefits for investors

Neither Montgomery nor Van Eck’s arguments go to the heart of what an Active ETF is, including:

Simple: I’m not sure when you last applied to invest directly in a managed fund but I’m sure after the first 20 pages of form filling you were left wondering why it’s so hard. Try doing that across multiple managed funds and it’s enough to head to the pub to spend your hard-earned savings. Any ETF, active or passive, are bought and sold like a share on the ASX. Open a brokerage account once. Trade as many ETFs as you like at the click of a mouse without any more forms.

Accessible: A typical managed fund has a minimum investment size of anywhere between $5,000 and $20,000. ETFs have no minimums and can thus be bought in smaller amounts.

Low transaction cost: Investing in ETFs requires the payment of a brokerage fee as with buying or selling an ASX share. These costs usually depend on the size of the transaction but trading online starts at $10 to $20. This includes the ASX as your ‘platform’ to settle and report a trade. Those costs are good compared to managed fund platform costs that are between 0.2% - 0.4%. Fund manager fees for Active ETFs are broadly similar to equivalent strategies in an unlisted managed fund. Passive ETFs typically have lower fees than Active ETFs, much the same way that passive unlisted managed funds have lower fees than active unlisted managed funds.

Liquid: One of the most common misunderstandings about ETFs is that they are only as liquid as the number of ETF units that trade on the ASX. ETFs do trade like shares and the liquidity of a share is indicated by its average daily value traded. Unlike shares, ETFs hold a basket of securities (such as shares) and the liquidity of the ETF is determined by the liquidity of the underlying basket of securities. The ASX rules only allow liquid securities as investments in Active ETFs and thus the liquidity of an Active ETF is many multiples larger than the ‘on-screen’ ASX value traded in the ETF. If all the investors in an ETF wanted to sell out of the ETF, the ETF issuer could sell the (liquid) basket of underlying securities to return the cash to the investors. Two identical strategies in the form of an ETF and a managed fund would have the same liquidity. The ETF would have the added ‘liquidity’ benefit to an investor of the ability to buy and sell the ETF (and switch into other ETFs) intraday. This liquidity is not available in unlisted funds.

Transparent: ETFs are bought and sold at net asset value or NAV (less a bid/offer spread much like managed funds). There are no discounts or premiums to consider, which can exist with closed-end funds such as Listed Investment Companies (LICs). ETF prices are quoted ‘live’ on the ASX during trading hours and issuers of Active ETFs publish an indicative NAV or iNAV that closely approximates the actual portfolio NAV during the day. Unlisted funds by comparison typically offer end of day NAV for subscriptions and redemptions. An investment made in the morning must wait for a price to buy the fund at the end of the day. Active ETFs are required to disclose their full portfolio holdings. Yes, for some Active ETFs, this is only provided quarterly, but it’s still a higher level of disclosure than most unlisted managed funds.

The rise of Active ETFs

The ETF industry in Australia is still relatively small. ASX-listed ETF assets under management (AUM) at end December 2018 was about $40 billion, roughly the same size as the LIC market. This is not a bad effort given the ETF market is much younger.

Of that, Active ETFs are only about $3.5 billion and are the new kid on the block. By contrast, the Australian retail managed fund industry AUM is about $600 billion, most of which is in active funds.

ETFs therefore make up less than 7% of the managed fund industry in Australia. By contrast, in the US, the ETF industry has US$3.5 trillion of AUM and is about 20% of the size of the mutual fund (managed fund) industry. The penetration of ETFs in Australia is destined to catch up with that of the US. Active ETFs, coming off a low base, will show even stronger growth.

Active ETFs are a great Australian invention and the regulator and stock exchange should be applauded for showing global leadership.


Chris Meyer is Director of Listed Products at Pinnacle Investment Management which includes global equities manager Antipodes Partners that recently launched an active global equities ETF. This article is for general information only and does not constitute personal financial advice nor consider the needs of any individual.



Active or passive ETFs: how do you decide?

Finding opportunities in listed global funds

How do Active ETFs and managed funds differ?


Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.


Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.


Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.


10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.