ETF Edge, February 12, 2024

ETF Edge, February 12, 2024

Active ETFs

  • Active ETFs are gaining popularity, with 75% of all ETF launches in 2023 being active.
  • Option-based ETFs that collect premiums and protect against downside risk were popular in 2022 but may underperform in rising markets.
  • Dimensional Fund Advisors focuses on factor-based investing and believes active management can help investors achieve long-term goals.
  • Active ETFs provide daily transparency into their holdings, allowing investors to see what is being held in their portfolios.
  • Active ETFs can help investors manage concentration risk by providing more choice and flexibility in portfolio construction.
  • The use of both active and passive ETFs can help manage concentration risk.

Systematic Active Management

  • Systematic active management focuses on targeting premiums through better diversification strategies.
  • Systematic active management offers the benefits of diversification and low indexing costs while outperforming traditional stock-picking active management.
  • Investors can consider systematic active management as a balance between passive and active investing, without having to choose exclusively between the two.

Trends in Active Investing

  • Trends in active investing include the acquisition of bond and fixed income ETFs, the search for income, and the launch of floating rate ETFs to meet customer needs.
  • The conversion of some mutual funds into ETFs is a growing trend, allowing portfolio managers to take advantage of ETF benefits.
  • Options-based strategies and licensing of indexes like the NASDAQ 100 provide opportunities for repackaging and selling investment products.

Thematic Tech Investing

  • Thematic Tech investing, including areas like cybersecurity, robotics, cloud computing, electric vehicles, and social media, has experienced fluctuations over the past decade.
  • Artificial intelligence ETFs, such as IRBT, BOTS, and ROBO, have gained attention and popularity in recent times.

The Role of Financial Advisors

  • Advisors play a crucial role in helping investors stay on track and avoid mistakes due to intraday noise.
  • The challenge for advisors is to connect more deeply with clients as AI handles routine tasks.
  • Financial advisors are shifting from being order takers to guides, helping clients achieve their goals and manage their dreams.

AI in Financial Advice

  • Generative AI has shifted the focus from AI investments to how financial advisors can use AI tools to enhance their services.
  • AI tools can now generate financial podcasts and text, freeing up advisors' time for deeper client relationships and additional tasks.
  • AI is getting better at generating content, but it is not yet able to truly understand people and their individual struggles.
  • AI-generated content can be accurate, but it is important for humans to know how to prompt it properly to avoid mistakes.

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