In the evolving landscape of investment strategies, active exchange-traded funds (ETFs) have emerged as a compelling option for investors seeking to optimize their portfolios. These funds not only offer the potential for enhanced returns through active management but also present significant tax advantages, making them an attractive choice for those aiming to reduce their tax liabilities.
Active ETFs combine the benefits of active management with the structural advantages of ETFs, particularly in terms of tax efficiency. Unlike traditional mutual funds, ETFs utilize an in-kind creation and redemption process, allowing investors to exchange ETF shares for the underlying securities without triggering taxable events. This mechanism helps minimize capital gains distributions, a common tax burden associated with mutual funds.
Recent data underscores the growing popularity of active ETFs. As of the end of 2024, global assets under management in active ETFs had risen to $1.075 trillion, up from $669 billion the previous year, reflecting a significant shift toward these tax-efficient investment vehicles.
"Incorporating active ETFs into our clients' portfolios allows us to leverage their tax efficiency while actively managing risk and return. This dual benefit is crucial in today's investment environment."
Xerxes Soli Mullan, Founder of Avestar Capital, emphasized the strategic advantages of active ETFs.
Tax-Loss Harvesting Opportunities: Active ETFs provide investors with the flexibility to engage in tax-loss harvesting strategies. By selling securities that have declined in value, investors can offset capital gains elsewhere in their portfolios, thereby reducing their overall tax liability.
Capital Gains Management: The active management within these ETFs allows portfolio managers to make strategic decisions about when to realize gains or losses, potentially deferring taxes and optimizing after-tax returns.
Lower Capital Gains Distributions: Compared to mutual funds, active ETFs generally distribute fewer capital gains. In 2024, only 5% of ETFs distributed capital gains, compared to 43% of mutual funds, highlighting the tax efficiency of ETFs.
"Active ETFs provide us with the flexibility to adjust our investment strategies dynamically, enabling us to respond to market changes while maintaining tax efficiency."
Brian Fullerton, Chief Investment Officer at Avestar Capital, discussed the role of active ETFs in portfolio construction.
While active ETFs offer numerous benefits, investors should consider the following:
Shilpa Konduri, President of Avestar Capital, highlighted the growing adoption of active ETFs:
"The shift towards active ETFs is not just a trend but a response to the demand for more tax-efficient investment solutions. Our clients are increasingly seeking ways to minimize tax impact without compromising on performance."
Active ETFs offer a powerful tool for investors seeking to boost returns while minimizing tax liabilities. By offering the benefits of active management within a tax-efficient structure, these funds align with the needs of modern investors seeking to optimize their portfolios. As the investment landscape continues to evolve, active ETFs are poised to play a pivotal role in shaping the future of portfolio management.
Disclaimer:
Nothing in this article constitutes an offer or solicitation of an offer; information within this may have been provided by third parties, and Avestar Capital has not independently verified such information.
References:
https://informaconnect.com/how-active-etfs-can-help-investors-fine-tune-portfolio-construction/
