• This article covers the key advantages of ETFs over conventional investment funds for asset managers.
• The information is intended for managers looking to develop comprehensive, diversified strategies using ETFs.
• FlexFunds offers an asset securitization program that optimizes the distribution of ETFs and investment funds. For more information, do not hesitate to contact our experts.

Until a little over a decade ago, the choice between ETFs and investment funds was largely confined to the debate between passive and active management.

ETFs were almost exclusively associated with index replication, while conventional funds concentrated the bulk of active strategies.

However, the 2008 launch of the first actively managed ETFs marked a turning point for the industry, broadening the range of solutions available for more sophisticated investment mandates.

What is an ETF and how has it evolved in recent years?

Since then, the growth of active ETFs has been sustained, driven by demand for more efficient, flexible, and transparent structures capable of integrating active management processes without sacrificing the operational advantages inherent to exchange-traded vehicles.

This progress has generated a progressive convergence between both formats, requiring investment professionals to evaluate not only the underlying strategy, but also the vehicle’s architecture.

For this reason, according to PwC, the global ETF industry is expected to reach USD 30 trillion by 2029.

Key structural and operational differences

One of the main differences between a managed ETF and a conventional investment fund lies in its operational structure and trading mechanism.

ETFs trade in regulated markets, allowing their buying and selling throughout the entire trading session, with prices that continuously adjust based on supply and demand, supported by market makers and arbitrage mechanisms.

In contrast, conventional investment funds operate at net asset value (NAV), which is generally calculated at market close.

Subscriptions and redemptions are executed at that value, which introduces a time gap between the investment decision and its effective execution. For certain mandates, this factor may be relevant in terms of timing, liquidity management, and risk control.

From an institutional perspective, intraday trading of managed ETFs allows for greater tactical precision, particularly in high-volatility environments or when immediate exposure adjustments are needed without altering the portfolio’s overall structure.

Strategic advantages of ETFs in global distribution

The incorporation of active management into the ETF format has made it possible to bring traditional strategies (such as fundamental selection, quantitative approaches, smart beta, or dynamic asset allocation) into an exchange-traded vehicle.

This has expanded the use of ETFs beyond passive allocation, positioning them as portfolio construction tools and comprehensive portfolio management.

Unlike traditional funds, managed ETFs typically offer a higher level of transparency in portfolio composition, with daily or periodic position disclosure.

For asset managers and investment advisors, this attribute facilitates risk analysis, integration into asset allocation models, and tracking of aggregate exposures at the portfolio level.

However, this transparency also demands careful management of the strategy, particularly in less liquid markets or when implementing positions that could be competitively sensitive.

ETF as an efficient vehicle for institutional strategies

Costs, tax efficiency, and operational considerations

In terms of costs, both vehicles present differentiated structures.

Managed ETFs often benefit from in-kind creation and redemption mechanisms, which can reduce the need to liquidate positions within the fund and, in certain jurisdictions, improve the vehicle’s tax efficiency.

Additionally, the exchange-traded structure allows for operational optimization in managing inflows and outflows.

Conventional investment funds, on the other hand, may face higher operational costs associated with managing subscriptions and redemptions, as well as potential portfolio impacts when they must execute trades to meet significant capital movements.

From a total implementation cost perspective, the analysis should go beyond explicit management fees and include factors such as transaction costs, spreads, market impact, and tax efficiency, particularly in large-volume portfolios.

Liquidity and execution in professional mandates

Liquidity is another key element in the comparison. In ETFs, the on-screen observable liquidity does not always reflect the vehicle’s actual liquidity, which depends largely on the depth and liquidity of the underlying assets.

However, for experienced managers, access to secondary markets and interaction with market makers allow for the efficient execution of sizeable trades.

In conventional funds, liquidity is directly tied to the manager’s ability to meet redemption without adversely impacting the portfolio, which can be critical in strategies involving less liquid assets.

Criteria for selecting the right vehicle

For investment professionals, the choice between a managed ETF and an investment fund is not a binary decision, but rather a comprehensive analysis that must be considered:

• The type of strategy and its degree of turnover.
• The need for liquidity and tactical flexibility.
• The cost structure and its impact on risk-adjusted returns.
• The vehicle’s operational and tax efficiency.
• The integration of the instrument within a broader portfolio architecture.

In this context, actively managed ETFs are establishing themselves as a complementary alternative to conventional funds, particularly well-suited for strategies that require agility, transparency, and operational efficiency, without sacrificing alpha generation capability.

It is worth noting that FlexFunds offers an asset securitization program to enhance the distribution of both ETFs and investment funds, making it easier for asset managers and other financial sector professionals to attract clients.To learn more about FlexFunds products, do not hesitate to contact our executives. We will be glad to assist you!