A managed fund is a pool of investors’ money, which is invested by a professional. For example, 1,000 investors invest $10,000 each into a special bank account and get 10,000 “units” in return. That is, $1 might buy you 1 unit.
Once the money is in the fund, the professional fund manager (which may be an individual, a group of analysts or an entire company) will invest that money. If the investments do well the unit price will increase.
If you had invested $10,000 and the ‘unit price’ (which is normally published on the fund manager’s website) went up 10% (to $1.10 each), your original investment is now worth $11,000 (10% more). You could sell your units (also called a withdrawal or ‘redemption’) and take your cash.
What is an active ETF?
The major difference between a normal unlisted ‘managed fund’ and an ASX-listed managed fund is how you get your money in-and-out of the fund.
An Exchange Traded Managed Fund (ETMF) or Active ETF is simply a managed fund which is listed on the stock exchange. The ASX categorises Active ETFs differently to standard ETFs to let you know that it uses an active strategy (i.e. not an index strategy).
What is an “active strategy”?
At Best ETFs we categorise active ETFs as a separate type of ETF compared to index ETFs. Active ETFs use human oversight, opinion, research and input to make a decision on which investments to buy or sell.
Index ETFs/funds have a standard set of rules they follow (e.g. they follow a market capitalisation index).
“Rules-based ETFs” (e.g. value ETFs or income-focused ETFs) also follow rules. However, they are not standard rules. They use a mixture of different mathematical formulas to create a portfolio inside the ETF. For example, they might create an ETF which only buy shares with high dividend yields. We categorise these ETFs separately to active ETFs, index funds and hedge fund ETFs.
We have a separate category for hedge funds ETFs. We categorise ETFs and funds as “hedge funds” if they use shorting, derivatives (other than for hedging currencies), trading strategies or leverage.