Why active management is a great game in the short term

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WWith the markets looking hesitant and the specter of economic recovery looming, the question of where and how to invest hangs over many heads. Enter actively managed funds with their ability to react quickly to market movements, typically outperforming benchmarks in times of short-term uncertainty.

While passive funds typically outperform over the long term, according to Seeking Alpha (think ETF SPDR S&P 500 (ESPION), which has outperformed virtually all large-cap funds in its class over the past decade, including actively managed ones), over shorter time frames, it’s the actively managed funds that thrive.

Active management has its own risks inherent in being guided by people (no one is perfect after all), but active fund managers seek to outperform their benchmarks by making what they see as moves. intelligent marketplaces.

Consider the example below:

An investor has an investment in fund A, a passively managed fund that is benchmarked against an index with the top 30 orange growers in the United States and can only invest in securities within the index. The same investor also has an investment in fund B, an actively managed fund that draws the majority of its securities from the same index but is not locked into securities only within the index.

A drought hits one of the main orange growing regions and suddenly orange production collapses and the whole index takes a sharp downward turn. Fund A is forced to weather fluctuations, and as investors panic and withdraw their investments, the fund manager may be forced to sell percentages of all securities invested, regardless of their valuation. Fund B, meanwhile, is able to recognize that some stocks are untouched or even in short supply, whose valuation is now rising, while those affected by drought are collapsing.

The active manager may reallocate stocks to performing stocks or choose to buy more currently undervalued stocks with the knowledge that they will recover, depending on the investment objectives of the fund. They also have the additional option of transferring assets to securities outside the index. In this short period of downturn, fund B has a good chance of outperforming the benchmark, either by protecting itself from such a drastic loss as the passive fund would suffer, or perhaps even by profiting.

Active funds mean flexibility, and this flexibility is most useful and apparent in times of rapid market movement or uncertainty. While actively managed funds cost more and can potentially result in a greater distribution of capital gains as there may be more buying and selling of securities, the benefits in times of turmoil can often outweigh these. costs.

T. Rowe Price believes in the difference and the benefits of active management. The company currently offers five actively managed ETFs, including the T. Rowe Price Dividend Growth ETF (TDVG) and the T. Rowe Price Growth Equity ETF (TGRW). The company brings a wealth of experience and research to its products, with portfolio managers averaging over 20 years of investment each, as well as more than 400 investment professionals dedicated to researching companies within ETFs.

For more news, information and strategy, visit Active ETF Channel.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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