Active ETFs: A paradigm shift for sustainable investing

  • 02 September 2022 (5 min read)

The world is changing – and, with it, the way people invest. Themes like climate protection, resource conservation or clean energy are playing an increasingly important role for investors, and beyond. A study by fund rating agency Morningstar shows just how large the market for sustainable investments has already become: At the end of 2021, there was a total volume of $2,740,000m invested in sustainable funds worldwide.1

When it comes to fund investments in sustainable themes, investors previously had a choice between on one hand, actively and passively managed mutual funds, and on the other hand passive ETFs – all of them offering a number of specific advantages.

But now, a new generation of funds has emerged and is bringing together potentially the best of both worlds. The stage has been set for active ETFs.

What are active ETFs?

The market for active ETFs is still relatively small – but the paradigm shift has already begun, and demand for this hybrid investment solution is likely to increase dynamically within the next few years. We should start by defining exactly what an active ETF is, and what it is not.

Active ETFs are exchange-traded funds whose aim is to generate greater returns through targeted stock selection. Active ETFs do not track the performance of a reference index as closely as possible while passive ETFs do.

Investing actively and flexibly in a more sustainable future

Active ETFs combine the potential advantages of autonomous active management with the convenience, transparency, and tradability of an ETF.

Your portfolio is not rigidly linked to an index and is constructed and actively managed by a fund manager. At the same time, active ETFs are admitted to and traded on an exchange. This ensures high liquidity, provides continuous pricing in real time, and enables responsive and flexible trading.

A key feature of active ETFs is to be dissociated from an index: especially for ESG investments, this can result in a number of potential advantages. Indices are generally based on strict, quantitative allocation models, with components usually weighted according to their market capitalisation. An index-tracking ETF cannot deviate from this.

Active ETFs are therefore managed by portfolio managers who can make their own determination as to whether a stock from the selection universe should be invested or not. Where passive ETFs are constraint by the RI methodology of Index providers, active ETFs allow the Asset Manager to implement its in house RI capabilities.

Meanwhile, an active ETF manager can draw on a significantly larger selection universe. This offers the manager greater freedom to invest in securities that, for whatever reason, are not covered by a thematic index but which, from the fund manager’s perspective, represent a sensible and promising source of enhanced performance within a sustainable portfolio. An active approach provides the freedom to choose stocks providing the desired exposure to sustainable themes such as fighting climate change or protecting biodiversity.

More than 20 years of experience

Active ETFs are an exciting new potential solution to investing in the major trends of the future – especially in sustainable topics such as climate protection, resource conservation or clean energy.

AXA IM has more than 20 years of experience in the active management of sustainable investments, and now delivers this active expertise with additional quantitative analysis in an ETF wrapper.

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