Actively Traded ETF

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Definition: Actively Traded ETF

Exchange Traded Fund (ETF) is a marketable security that is traded like common stocks in exchanges. It tracks an index, a commodity, or a basket of commodity.Actively Traded ETFs are ETFs that have active investors relying on their own judgment, experience, analytical research and forecast to make investment decisions on what securities to buy, hold or sell.

These types of ETFs are traded with the intention of outperforming the market, achieving income needs or protecting one’s portfolio from market crash. The investors are not always content with the safe option with getting average returns. They often want to outperform the market and gain abnormal profits. Active trading allows intraday trading and gives opportunity to the investors to track the direction of the market and gain profits accordingly. All the strategies like fundamental analysis, technical analysis, quantitative analysis and macroeconomic analysis that are used for trading stocks can also be used for trading ETFs as well.

The biggest challenge faced during active trading of ETFs is coping up with transparency issues as ETFs are required to publish their holdings daily. The ETFs follow indexes and their holdings are known to everyone. The transparency challenges faced are:

1. Front Running:

This is a concern for individual firms actively managing ETFs. Different fund managers use different strategies for managing their funds and if their holdings are revealed investors can use this information to create their own portfolios without paying the managers for their research and analysis. Also other competitors can use the same information researched and use it for their own advantage to create a desirable portfolio. It can lead to a lot of business going away.


2. Daily Disclosure:

The ETFs traded actively are traded like other stocks on the exchange and hence their holdings can change a number of times in an hour. It is logistically a very daunting task to provide real-time information as the trade happens.

3. Arbitrage

If the price of the ETF does not match the price of the underlying holdings, an investor can use this price difference for his/her advantage to gain high profits. Arbitrations happen on institutional levels as the investor needs to invest huge number of stocks to take advantage of arbitration.



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