Exchange-traded funds are akin to mutual funds, but with superior advantages. Bloomberg
Exchange-traded funds are akin to mutual funds, but with superior advantages. Bloomberg
Exchange-traded funds are akin to mutual funds, but with superior advantages. Bloomberg
Exchange-traded funds are akin to mutual funds, but with superior advantages. Bloomberg

What are the pros and cons of active and passive ETFs?


  • English
  • Arabic

Exchange-traded funds (ETFs) have been popular global investment instrument over the past 30 years.

As the name suggests, ETFs are pooled investment securities that can be bought or sold through a brokerage or an exchange, as is the case for do-it-yourself investors.

They are akin to mutual funds but with superior advantages. They are more tax-efficient and offer trading flexibility while providing portfolio diversification and risk management.

The ETF industry was predominantly perceived as synonymous with plain vanilla index investing until 2008. However, active management has garnered traction in recent years.

Passive ETFs

Passive ETFs are long-term investments that track the performance of an underlying index, sector, or asset class.

As a result, they have a lower expense ratio and lower trading costs because investors do not need to adjust their portfolios frequently.

They are a stable way for investors to quickly achieve their desired risk profile with the index or sector of their choice.

Passive ETFs replicate the holdings of the underlying index – based on clear and sound principles.

Compared to investments such as active ETFs and mutual funds, passive ETFs generate less capital gains distribution, have a lower portfolio turnover and tend to use in-kind redemptions to avoid selling securities at a gain.

Passive ETFs are less flexible because investors cannot make custom changes to their portfolio or adopt defensive strategies if market risk intensifies. This makes it challenging to capture lucrative opportunities or adopt protective measures during a market downturn.

Active ETFs

An active ETF is a cleverly designed investment vehicle that integrates the features of passive ETFs and traditional mutual funds.

Instead of tracking an index, it aims to outperform a benchmark by virtue of active selection and management of constituent securities.

Implementing discretionary strategies that modify exposure to asset classes based on the ever-evolving macroeconomic conditions has enabled asset managers to capitalise on market inefficiencies and mispriced securities to deliver higher returns over time.

On average, active ETFs have a higher annual expense ratio of 0.57 per cent relative to an average of 0.26 per cent for passive ETFs.

This is directed towards conducting comprehensive research and due diligence to generate higher risk-adjusted returns and perform active risk management.

Active ETF managers are bound by law to provide daily disclosures to investors.

While this ensures higher transparency, it hinders an active manager’s ability to adjust holdings and implement investment strategies, some of which could be proprietary, without the risk of giving away their edge to competitors and other traders in the market.

Active ETFs do not necessarily outperform their passively managed counterparts or the underlying index by default. A large portion of the outperformance is dependent on the skill of the asset manager in question.

Active ETFs do not necessarily yield higher returns than their passively managed counterparts by default
Vijay Valecha,
chief investment officer at Century Financial

They are gaining in popularity among investors, particularly in volatile and uncertain market conditions such as those that prevailed for a significant part of 2022.

In such instances, some investors might be inclined to trust a qualified professional with a proven track record to manage their investments for a fee rather than managing risk themselves.

This grants investors access to sophisticated research and trading strategies that may give them an edge over passive investors.

ETF inflows surged to $40 billion in January 2023 alone – nearly double that month’s historical average.

Analysts are projecting active ETFs to gain traction and deliver outsized growth in 2023.

Nevertheless, active ETFs do not necessarily yield higher returns than their passively managed counterparts by default.

This is evident from the mixed performance of dollar-denominated ETFs over the past five years.

For instance, active ETFs fared better in the fixed-income and value equity categories, while passive ETFs emerged victorious over their functional counterparts in specific classes like large-cap and growth equities.

Nevertheless, 31 per cent of actively managed ETFs have outperformed the market so far this year. By comparison, 58 per cent of active ETFs outperformed the market in 2022.

Vijay Valecha is the chief investment officer at Century Financial

While you're here
Living in...

This article is part of a guide on where to live in the UAE. Our reporters will profile some of the country’s most desirable districts, provide an estimate of rental prices and introduce you to some of the residents who call each area home.

ENGLAND SQUAD

Joe Root (c), Moeen Ali, Jimmy Anderson, Jonny Bairstow, Stuart Broad, Jos Buttler, Alastair Cook, Sam Curran, Keaton Jennings, Ollie Pope, Adil Rashid, Ben Stokes, James Vince, Chris Woakes

Ukraine

Capital: Kiev

Population: 44.13 million

Armed conflict in Donbass

Russia-backed fighters control territory

The National's picks

4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young

The low down on MPS

What is myofascial pain syndrome?

Myofascial pain syndrome refers to pain and inflammation in the body’s soft tissue. MPS is a chronic condition that affects the fascia (­connective tissue that covers the muscles, which develops knots, also known as trigger points).

What are trigger points?

Trigger points are irritable knots in the soft ­tissue that covers muscle tissue. Through injury or overuse, muscle fibres contract as a reactive and protective measure, creating tension in the form of hard and, palpable nodules. Overuse and ­sustained posture are the main culprits in developing ­trigger points.

What is myofascial or trigger-point release?

Releasing these nodules requires a hands-on technique that involves applying gentle ­sustained pressure to release muscular shortness and tightness. This eliminates restrictions in ­connective tissue in orderto restore motion and alleviate pain. ­Therapy balls have proven effective at causing enough commotion in the tissue, prompting the release of these hard knots.

UAE currency: the story behind the money in your pockets
The biog:

From: Wimbledon, London, UK

Education: Medical doctor

Hobbies: Travelling, meeting new people and cultures 

Favourite animals: All of them 

What can victims do?

Always use only regulated platforms

Stop all transactions and communication on suspicion

Save all evidence (screenshots, chat logs, transaction IDs)

Report to local authorities

Warn others to prevent further harm

Courtesy: Crystal Intelligence

ESSENTIALS

The flights

Emirates flies from Dubai to Phnom Penh via Yangon from Dh2,700 return including taxes. Cambodia Bayon Airlines and Cambodia Angkor Air offer return flights from Phnom Penh to Siem Reap from Dh250 return including taxes. The flight takes about 45 minutes.

The hotels

Rooms at the Raffles Le Royal in Phnom Penh cost from $225 (Dh826) per night including taxes. Rooms at the Grand Hotel d'Angkor cost from $261 (Dh960) per night including taxes.

The tours

A cyclo architecture tour of Phnom Penh costs from $20 (Dh75) per person for about three hours, with Khmer Architecture Tours. Tailor-made tours of all of Cambodia, or sites like Angkor alone, can be arranged by About Asia Travel. Emirates Holidays also offers packages. 

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Unresolved crisis

Russia and Ukraine have been locked in a bitter conflict since 2014, when Ukraine’s Kremlin-friendly president was ousted, Moscow annexed Crimea and then backed a separatist insurgency in the east.

Fighting between the Russia-backed rebels and Ukrainian forces has killed more than 14,000 people. In 2015, France and Germany helped broker a peace deal, known as the Minsk agreements, that ended large-scale hostilities but failed to bring a political settlement of the conflict.

The Kremlin has repeatedly accused Kiev of sabotaging the deal, and Ukrainian officials in recent weeks said that implementing it in full would hurt Ukraine.

The candidates

Dr Ayham Ammora, scientist and business executive

Ali Azeem, business leader

Tony Booth, professor of education

Lord Browne, former BP chief executive

Dr Mohamed El-Erian, economist

Professor Wyn Evans, astrophysicist

Dr Mark Mann, scientist

Gina MIller, anti-Brexit campaigner

Lord Smith, former Cabinet minister

Sandi Toksvig, broadcaster

 

TERMINAL HIGH ALTITUDE AREA DEFENCE (THAAD)

What is THAAD?

It is considered to be the US's most superior missile defence system.

Production:

It was created in 2008.

Speed:

THAAD missiles can travel at over Mach 8, so fast that it is hypersonic.

Abilities:

THAAD is designed to take out  ballistic missiles as they are on their downward trajectory towards their target, otherwise known as the "terminal phase".

Purpose:

To protect high-value strategic sites, such as airfields or population centres.

Range:

THAAD can target projectiles inside and outside the Earth's atmosphere, at an altitude of 150 kilometres above the Earth's surface.

Creators:

Lockheed Martin was originally granted the contract to develop the system in 1992. Defence company Raytheon sub-contracts to develop other major parts of the system, such as ground-based radar.

UAE and THAAD:

In 2011, the UAE became the first country outside of the US to buy two THAAD missile defence systems. It then stationed them in 2016, becoming the first Gulf country to do so.

Tips for job-seekers
  • Do not submit your application through the Easy Apply button on LinkedIn. Employers receive between 600 and 800 replies for each job advert on the platform. If you are the right fit for a job, connect to a relevant person in the company on LinkedIn and send them a direct message.
  • Make sure you are an exact fit for the job advertised. If you are an HR manager with five years’ experience in retail and the job requires a similar candidate with five years’ experience in consumer, you should apply. But if you have no experience in HR, do not apply for the job.

David Mackenzie, founder of recruitment agency Mackenzie Jones Middle East

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The specs

Engine: 2.0-litre 4cyl turbo

Power: 261hp at 5,500rpm

Torque: 405Nm at 1,750-3,500rpm

Transmission: 9-speed auto

Fuel consumption: 6.9L/100km

On sale: Now

Price: From Dh117,059

UAE currency: the story behind the money in your pockets
PROFILE OF HALAN

Started: November 2017

Founders: Mounir Nakhla, Ahmed Mohsen and Mohamed Aboulnaga

Based: Cairo, Egypt

Sector: transport and logistics

Size: 150 employees

Investment: approximately $8 million

Investors include: Singapore’s Battery Road Digital Holdings, Egypt’s Algebra Ventures, Uber co-founder and former CTO Oscar Salazar

Our legal consultant

Name: Hassan Mohsen Elhais

Position: legal consultant with Al Rowaad Advocates and Legal Consultants

Company%20profile
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Sole survivors
  • Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
  • George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
  • Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
  • Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
Women’s T20 World Cup Asia Qualifier

ICC Academy, November 22-28

UAE fixtures
Nov 22, v Malaysia
Nov 23, v Hong Kong
Nov 25, v Bhutan
Nov 26, v Kuwait
Nov 28, v Nepal

ICC T20I rankings
14. Nepal
17. UAE
25. Hong Kong
34. Kuwait
35. Malaysia
44. Bhutan 

UAE squad
Chaya Mughal (captain), Natasha Cherriath, Samaira Dharnidharka, Kavisha Egodage, Mahika Gaur, Priyanjali Jain, Suraksha Kotte, Vaishnave Mahesh, Judit Peter, Esha Rohit, Theertha Satish, Chamani Seneviratne, Khushi Sharma, Subha Venkataraman

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PROFILE BOX:

Company/date started: 2015

Founder/CEO: Rami Salman, Rishav Jalan, Ayush Chordia

Based: Dubai, UAE

Sector: Technology, Sales, Voice, Artificial Intelligence

Size: (employees/revenue) 10/ 100,000 downloads

Stage: 1 ($800,000)

Investors: Eight first-round investors including, Beco Capital, 500 Startups, Dubai Silicon Oasis, Hala Fadel, Odin Financial Services, Dubai Angel Investors, Womena, Arzan VC

 

How to play the stock market recovery in 2021?

If you are looking to build your long-term wealth in 2021 and beyond, the stock market is still the best place to do it as equities powered on despite the pandemic.

Investing in individual stocks is not for everyone and most private investors should stick to mutual funds and ETFs, but there are some thrilling opportunities for those who understand the risks.

Peter Garnry, head of equity strategy at Saxo Bank, says the 20 best-performing US and European stocks have delivered an average return year-to-date of 148 per cent, measured in local currency terms.

Online marketplace Etsy was the best performer with a return of 330.6 per cent, followed by communications software company Sinch (315.4 per cent), online supermarket HelloFresh (232.8 per cent) and fuel cells specialist NEL (191.7 per cent).

Mr Garnry says digital companies benefited from the lockdown, while green energy firms flew as efforts to combat climate change were ramped up, helped in part by the European Union’s green deal. 

Electric car company Tesla would be on the list if it had been part of the S&P 500 Index, but it only joined on December 21. “Tesla has become one of the most valuable companies in the world this year as demand for electric vehicles has grown dramatically,” Mr Garnry says.

By contrast, the 20 worst-performing European stocks fell 54 per cent on average, with European banks hit by the economic fallout from the pandemic, while cruise liners and airline stocks suffered due to travel restrictions.

As demand for energy fell, the oil and gas industry had a tough year, too.

Mr Garnry says the biggest story this year was the “absolute crunch” in so-called value stocks, companies that trade at low valuations compared to their earnings and growth potential.

He says they are “heavily tilted towards financials, miners, energy, utilities and industrials, which have all been hit hard by the Covid-19 pandemic”. “The last year saw these cheap stocks become cheaper and expensive stocks have become more expensive.” 

This has triggered excited talk about the “great value rotation” but Mr Garnry remains sceptical. “We need to see a breakout of interest rates combined with higher inflation before we join the crowd.”

Always remember that past performance is not a guarantee of future returns. Last year’s winners often turn out to be this year’s losers, and vice-versa.

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F1 The Movie

Starring: Brad Pitt, Damson Idris, Kerry Condon, Javier Bardem

Director: Joseph Kosinski

Rating: 4/5

Updated: September 08, 2023, 5:00 AM`