Active ETFs have been gaining in popularity thanks to mutual fund conversions and thematic trends. While many active ETFs offer real benefits—particularly in fixed income and international equities—their higher fees deter many would-be investors. So recently, some funds have started waiving their fees to draw in new investors.
In this article, we’ll discuss the merits of active ETFs, how fees impact returns, and whether you should invest in funds waiving their fees.
The Rise of Active ETFs
More than 300 active ETFs have launched over the past year, providing investors with more options than ever. While most of this growth reflects mutual fund conversions, investors will also find many thematic funds like AI-focused funds, option income strategies like covered calls, and other unique approaches to generating alpha in today’s markets.
There are several reasons investors may want to consider these funds:
- Structural advantage: Active fixed income and international equity strategies could offer a structural advantage over passive strategies. For example, active fixed income strategies may consider upcoming interest rate decisions while active international strategies might factor in anticipated tariffs.
- Niche exposure: Thematic funds offer exposure to unique subsets of the market. If you believe these areas will experience growth, they offer more exposure than conventional passive index funds. Meanwhile, active thematic funds can adjust exposure based on factors other than market capitalization.
- Enhanced income: Income-focused active ETFs often use more advanced strategies to boost income. For instance, they might selectively invest in high-yield bonds or use covered calls to enhance income from an equity portfolio. So, if you’re an income-focused investor, they might make a lot of sense to add to your portfolio.
Of course, these reasons are just scratching the surface. Investors may also choose active ETFs for their superior risk management or countless other factors. But, in many cases, these strategies come at a higher cost—a topic we’ll explore next.
Impact of Fees on Returns
Most investors are familiar with the benefits of low-cost index investing thanks to years of advocacy from the likes of Jack Bogle and Vanguard. And, mathematically, there’s little doubt that lower fees will help boost returns over the long run. The difference between a 0.05% and a 1% fee can amount to hundreds of thousands of dollars over 30 years.
Source: DOL
Of course, fund fees aren’t inherently bad if the fund outperforms passive alternatives or better meets other requirements. For example, if you want to generate enough income to support your retirement needs but dividends alone aren’t enough, you may find a higher cost income-focused active ETF is worth the extra expense.
Active Funds Waiving Fees
Some active ETFs have begun waiving their fees in a bid to attract would-be investors. Fee waivers are common in many newly launched ETFs, but they usually occur for a finite amount of time. For instance, many fund managers waive fees for one year to help attract investors and then reimplement those fees after the waiver expires.
Active ETFs Waiving Fees
These ETFs are sorted by their YTD total return, which ranges from -34.9% to 25.4%. They have AUM between $7.25M and $960M and are currently yielding between 0% and 4.9%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Total Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| iShares Advantage Large Cap Income ETF | BALI | ETF | Yes | $26M | 25.4% | 4.9% | 0.35% |
| iShares Large Cap Value Active ETF | BLCV | ETF | Yes | $7.25M | 19.7% | 1.3% | 0.55% |
| AdvisorShares Pure US Cannabis ETF | MSOS | ETF | Yes | $958M | -34.7% | 0% | 0.85% |
| Roundhill Cannabis ETF | WEED | ETF | Yes | $8.76M | -34.9% | 0% | 0.4% |
Expense ratios reflect pre-waiver expenses. All funds on this list have a net expense ratio of 0% as of writing.
WEED and MSOS track the cannabis industry, which has experienced a drop over the past year. Both ETFs are down more than 30% as cannabis legalization has put pressure on dispensary margins. Meanwhile, BALI and BLCV are two active funds in the large-cap space, which is dominated by passively managed competitors.
Many other funds have discounted fees for a set period. Usually, these discounts will bring fees in line with passive alternatives to draw in new investors. The hope is these investors will appreciate the active ETF’s value add by the time the fee waivers expire, staying onboard and providing more income for the issuer.
The biggest thing to keep in mind with fee waivers is the expiration date. You can find this expiration date in the active ETF’s prospectus in the section covering fees. When investing in these funds, you should make note of this date and reevaluate the fund prior to the fee increase to ensure it’s meeting your expectations given the new higher fees.
The Bottom Line
Active ETFs have become increasingly popular due to mutual fund conversions, thematic trends, and innovative new strategies. To attract new investors, many of these funds offer full or partial fee waivers to make them more competitive in the market. That said, you should be mindful of when these waivers expire to avoid any surprises.
