The growing application of actively managed exchange-traded funds makes them highly lucrative investment products, given the developing opportunity set within the modern financial markets.
Some of the applications of actively managed ETFs include alternative indexing, low-cost portfolio rebalancing, setting thematic constraints, gaining exposure to illiquid asset classes and benefiting from diversification strategies via hedge fund-like vehicles.
Although actively managed ETFs often possess noteworthy risks, their inclusion into an investment portfolio ultimately diversifies risk.
Here are a few actively managed ETFs to consider.
Global X S&P 500 Covered Call ETF
The Global X S&P 500 Covered Call ETF (XYLD, Financial) is suitable for income-seeking investors.
The fund operates a covered call strategy on the S&P 500, meaning the fund managers purchase the stocks listed on the S&P 500 via representative sampling while covering 100% of its portfolio with short call positions.
The fund earns a premium from writing calls as it is a net liquidity provider. Moreover, it stays hedged, meaning it is risk-neutral, assuming that its hedged positions are efficiently executed.
As illustrated in the diagram below, the Global X S&P 500 Covered Call ETF distributes approximately 75% to 100% of the premiums it earns from its call options. Although a flow-through shortfall is evident, the ETF's retained earnings hedge against negative periods, allowing for consistent dividend distributions.
Source: Author's Work, Data from Global X ETFs
The ETF's 10-year total returns amount to approximately 82%, which I consider a highly lucrative figure for a low-risk ETF with diversification benefits.
The fund has a trailing dividend yield of 9.08%. The vehicle has yet to announce its September dividend; however, a look back suggests it might be around 30 cents per share.
Invesco Russell 1000 Dynamic Multifactor ETF
Multifactor investing is a growing concept. Commercially discovered in the early 1990s by Eugene Fama and Kenneth French, multifactor investing provides an asset pricing methodology that allows portfolio managers to enhance their understanding of cyclical market risk.
By using quantitative methods, the Invesco Russell 1000 Dynamic Multifactor ETF (OMFL, Financial) partitions investment styles into value, momentum and market capitalization to enhance allocation efficiency coherent to the business cycle.
Based on its current allocation, the ETF is overweight on small-cap value stocks, communicating conviction.
Source: Author's Work, Data From Invesco
Many argue that factor investing is a hybrid active-passive strategy. That is debatable; however, I argue the approach onboards noteworthy active risk, making it an active investment method.
A regression analysis suggests the Invesco Russell 1000 Dynamic Multifactor ETF has an information ratio of 0.38, indicating it generates returns above its targeted benchmark while maintaining a similar risk profile.
The IR ratio conveys a portfolio manager's value additivity; as such, the Invesco Russell 1000 Dynamic Multifactor ETF's positive IR is encouraging to witness.
Source: Portfolio Visualizer
The ETF provides a diversification strategy to most portfolios while delivering consistent dividends yielding 1.55% with a five-year compound annual growth rate of 36.63%. Thus, with all its salient features considered, the Invesco Russell 1000 Dynamic Multifactor ETF seems like a good bet.
Invesco S&P 500 Equal Weight ETF
The S&P 500's spectacular performance cannot be understated.
Robust economic trend growth within the United States coupled with a continuous supply of high-quality stock listings means the index is built on solid foundations. However, the S&P 500's market capitalization-weighted indexing methodology means it often suffers from crash risk. In addition, investors' exposure to the index's smaller holdings is usually negligible, defeating the purpose of choosing the index as a broadly diversified vehicle.
To account for the shortcomings mentioned above, Invesco created an equally weighted S&P 500 vehicle called the Invesco S&P 500 Equal Weight ETF (RSP, Financial). In my view, the ETF phases out crash risk while providing enhanced exposure to the S&P 500's more minor constituents.
Although the Invesco ETF might often underperform the S&P 500, it arguably presents a better indexing option as its risk is not overly concentrated.
The Invesco S&P 500 Equal Weight ETF pays a quarterly dividend, with its next payout likely due in late September. Moreover, at a dividend yield of 1.71%, it is evident that the fund's returns primarily stem from price gains; nevertheless, its payout provides a helping hand.
Concluding thoughts
Actively managed ETFs are growing in stature due to their broad application. The three ETFs mentioned provide investors access to alternative indexing, risk-neutral fund management and multifactor risk-return attribution.
Even though the three ETFs possess a few risks, key features suggest their return profiles are lucrative.
