Bryan Armour: At the start of 2019, actively managed ETFs represented just 2% of the US ETF market. Since then, the organic growth of active ETFs has consistently exceeded 20% per year. The number of active ETFs exploded fivefold and assets grew 7 times over the past five years. But active ETFs are still just scratching the surface.
Investors can benefit from ETFs’ tax efficiency and lower fees. Just 4% of active ETFs distributed capital gains last year versus 61% of mutual funds. And active ETFs with a substantially similar mutual fund strategy tend to be priced near or below institutional share class fee levels, giving retail investors a cheaper version of the same strategy. These advantages should have investors thinking twice before going back to the mutual fund well. I’ll give you three great active stock ETFs to consider:
3 Great Active ETFs for Stock Investors
- Dimensional US Core Equity 2 ETF DFAC
- Capital Group Dividend Value ETF CGDV
- Avantis International Equity ETF AVDE
The first ETF is Dimensional US Core Equity 2 ETF, ticker DFAC, which receives a Gold Medalist Rating for its diversified portfolio, low fee, and mild factor tilts that should provide a long-term edge.
The fund offers broad exposure to stocks of all sizes listed in the US, and it emphasizes those with lower valuations, higher profitability, and smaller market caps. This technique has two advantages. First, it tilts toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favor. Second, it cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme.
This ETF holds over 2,500 stocks and charges just 17 basis points, two reasons why it’s one of the most widely held active ETFs by investors. Recent performance has been mediocre as high-growth names have led the market, but this ETF could offer a contrarian approach to market-cap weighting without giving up on stocks like Tesla or Nvidia altogether.
The second ETF on my list is Capital Group Dividend Value ETF, ticker CGDV. This Silver-rated ETF’s strategy is closer to a traditional discretionary active mutual fund. Its long-tenured team picks stocks by combining an eye toward quality with an emphasis on income.
The strategy takes on a dividend growth tack by investing in stocks with a long history of paying dividends. But its managers can invest up to 10% in non-dividend-payers, allowing the portfolio to maximize the team’s fundamental research while still hitting its yield target.
Launched in the throes of 2022′s decline, this ETF has easily outperformed large-value peers and even beat the Russell 1000 by over 3 percentage points since inception.
The third ETF on my list is Avantis International Equity ETF, ticker AVDE. This Silver-rated ETF combines a broad portfolio with mild factors tilts, similar to the approach taken by the aforementioned Dimensional ETF.
Avantis pulls in developed-markets stocks of all sizes and overweights those with lower price/book multiples and higher profitability. Its systematic approach understates the value generated by its active management of the portfolio, which allows the ETF to limit trading costs and maximize tax efficiency. The fund has proven adept at beating indexed peers, as a result.
International investing hasn’t produced gaudy returns recently, but markets tend to move in and out of favor over the long run. This ETF provides active management on a portfolio of over 3,000 international stocks for just 23 basis points, and it’s earned an annualized 1.5-percentage-point advantage over its category index since its 2019 inception.
Please share your thoughts about these picks with me on Twitter (@mstararmour). You can also read more about active ETFs by downloading Morningstar’s Guide to US Active ETFs, which we published earlier this year. Thanks for tuning in.
Watch Active ETFs: What Investors Need to Know for more from Bryan Armour.
