Comparing passive and active ETFs means comparing the cost for both kinds. In a nutshell, the active in a higher expense ratio targets actively managed funds, while the lower the funds targets the passively managed ETFs. If you attempt to manage ETFs, it is vital for you to know that the management of funds works in an ETF. In the indexed-stock, ETF offers investors with the diversification in the index fund, sell short, buy on margin, buy a little share with no minimum deposit requirements. But it is to note that the diversification is not the same between one ETF to the other. Some diversification scenarios concentrate in one industry.
Actually, a mutual fund is less beneficial than an ETF. This is because buying and selling happen through an exchange. So, the ETF does not redeem shares whenever investors sell or issue shares. Moreover, when investors redeem shares, it could trigger tax liability. Thus, listing the shares could lower the tax costs. When the shares are redeemed, it could inflict tax liability. The ETF has a high market impact, because it is very popular among investors. Thus, the trading volumes are low for some of them. Since the volume is low, it becomes hard for investors to buy and sell easily.
There are actually many concerns arising from the popularity of the ETF. Too much demand on this fund could cause stock inflation and fragile bubbles. This is because many ETFs models are untested thus it could create a huge impact on inflows and outflows. Moreover, the ETF has played a negative role in the financial crisis and economic instability.
This is the reason why the supply of ETFs is through mechanism of creation and redemption. It also covers investors’ involvement namely authorized participants (APs). In the creation of the ETF, AP purchased shares of stocks from the index. AP sells this shares for gaining profit.
