The bulk of exchange-traded funds, or ETFs, are passively managed index funds, which means they're simply designed to track a certain benchmark index such as the S&P 500 or Russell 2000. However, it might surprise you to learn that there are hundreds of actively managed ETFs that aim to beat the market, provide additional income, or provide exposure to specific assets.
To be sure, when you're investing in actively managed ETFs, there are a few things to keep in mind. For one thing, it's important to keep fees in mind. You can find index funds with expense ratios of 0.10% or less, while it isn't uncommon for actively managed ETFs to have expenses that are five times this percentage, or even more. Second, there can be far more inherent risk with actively managed ETFs. Think of it this way: You can't have opportunities to beat the market without the potential of underperforming the market if things go poorly.
Having said all of that, here are three of my favorite actively managed ETFs and a little more about each one to help you decide if one of them could be a smart addition to your portfolio.
JPMorgan Equity Premium Income ETF
The largest actively managed ETF in the market, with $33 billion in assets under management, the JPMorgan Equity Premium ETF(NYSEMKT: JEPI) is what is known as a "covered call ETF."
In a nutshell, the fund invests in a portfolio of stocks, most of which are large-cap companies you're probably familiar with. Among the top 10 holdings of the ETF, you'll find Meta Platforms(NASDAQ: META), Amazon.com(NASDAQ: AMZN), Microsoft(NASDAQ: MSFT), and Intuit(NASDAQ: INTU), just to name a few examples, although the portfolio doesn't perfectly align with any index.
The ETF's managers then sell covered calls, or options, on the fund's positions to generate income and to be able to distribute an above-average yield to investors. While the income will fluctuate over time, the current payout gives the ETF a 7.7% annualized yield. Plus, for an actively managed ETF, the expense ratio of 0.35% is quite reasonable.
Avantis U.S. Small Cap Value ETF
I've written before about the disconnect between the valuations of small-cap and large-cap stocks in 2024. And the short version is that small caps are trading for their lowest price-to-book valuations relative to large-cap stocks in 25 years. Plus, not only are small caps attractively priced, but value stocks are trading cheaply relative to growth stocks, and as a group, they could have a lot to gain once interest rates start to fall.
The Avantis U.S. Small Cap Value ETF(NYSEMKT: AVUV) is an actively managed ETF that could be a big winner if these valuation gaps start to narrow. It has a 0.25% expense ration, which is clearly on the lower end for actively managed ETFs, and with more than $10 billion in assets, it has become rather popular among investors.
The ETF invests in a diverse portfolio of small-cap stocks with low valuations and strong profitability. Top holdings include Abercrombie & Fitch(NYSE: ANF), KB Home(NYSE: KBH), and Air Lease Corp(NYSE: AL), just to name a few.
Ark Innovation ETF
Last but certainly not least, the Ark Innovation ETF (NYSEMKT: ARKK) is a tech-focused ETF managed by Cathie Wood's Ark Invest, which aims to invest in disruptive businesses in a variety of industries. With $7.5 billion in assets, it is the largest of Ark's ETF offerings.
At any given time, the fund aims to hold between 35 and 55 stocks, and it has a rather concentrated portfolio. The top five holdings, which collectively make up nearly 40% of the ETF's assets, include Coinbase (NASDAQ: COIN), Tesla(NASDAQ: TSLA), Roku(NASDAQ: ROKU), Block(NYSE: SQ), and UiPath(NYSE: PATH).
It's important to note that this is likely to be the most volatile of the three ETFs discussed here, but it also has tremendous reward potential if things go well, especially for its largest positions. With a 0.75% expense ratio, this isn't a cheap ETF to invest in, but it can be a great way to get exposure to the next big innovations without the guesswork.
Three very different choices
To be perfectly clear, these are three very different ETFs that are appropriate for different investment goals. The JPMorgan Chase ETF could be a great choice for income-seeking investors, the small-cap value ETF could be a good long-term total return play at an attractive price, and the Ark Innovation ETF could be right for you if you want to invest in things like artificial intelligence, cryptocurrency, and autonomous vehicles, but aren't quite sure where to start.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matt Frankel has positions in Amazon and Block. The Motley Fool has positions in and recommends Amazon, Block, Coinbase Global, Intuit, Meta Platforms, Microsoft, Roku, Tesla, and UiPath. The Motley Fool recommends KB Home and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
