Global Perspectives: Understanding Active ETFs

Matthew Bullock: Hello and welcome to the latest recording in the Global Perspective Podcast series. My name is Matthew Bullock. I’m the head of Portfolio Construction and Strategy for EMEA and APAC at Janus Henderson, and today I’m very lucky to be joined by Amy Barron who looks after our ETF business here in Australia, also for Janus Henderson.

Amy Barron: Hi, Matt.

Matthew Bullock: So Amy, with innovation, accessibility and affordability driving demand, ETFs have been an area we’ve been hearing a lot about it lately and 2025 is certainly shaping up to be another strong year for ETFs here in Australia. So for a bit of background, the Australian ETF market has been on solid growth trajectory fuelled by increasing adoption across retail investors, self-managed super funds, wealth managers who are increasingly turning to ETFs as the building block for portfolio construction. So could you just give us a bit of background on why ETFs have been so popular?

Amy Barron: Sure, thank you, Matt. Well, I’m sure it’s not a surprise to those people listening or watching today to see the increased interest in ETFs. There are now over 400 ETFs listed on both the ASX and CBOE exchanges and Janus Henderson are actually the third largest active fixed income ETF provider in the world and what that success indicates to us, is that our solutions and all ETFs for that matter, are really resonating with end clients, whether that’s seasoned investors or newcomers alike and there are a few reasons why. I think the first, is that an ETF can provide immediate diversification, which spreads your risk, so when it comes to investing, you might have the option of buying BHP or CBA for example, and I’m just choosing those stocks because they’re both well known, so instead of allocating your money to one particular stock, you can do a trade in an ETF that gives you, for example to potentially 70 underlying companies, or with one ETF trade you can get exposure to several bonds or a diversified property portfolio, diversified infrastructure, currency and the list goes on. So that would be the first benefit, the immediate diversification just with one trade. I would say the second reason why people are attracted to ETFs is because they are cost effective. So, I mentioned before you might be buying an ETF, one ETF that gives you exposure to 70 underlying stocks, if you were to go and buy those individual stocks, you would be paying brokerage on every single trade, whereas here, it’s one trade and you’re done. And I think the third reason is that ETFs are generally providing greater transparency. In that, if you are listed on an exchange, there is a requirement for you to disclose on a daily basis what your underlying holdings are versus a traditional managed fund, which typically only reveals their top ten for the month that’s just gone, so they may not even own that top ten anymore.

Matthew Bullock: So in Australian market, there’s sort of hundreds, 400 plus ETF’s out there, so it’s going to be very difficult for an investor to try to sort of navigate their way around it. So from your experience, what should investors be looking out for when selecting an ETF?

Amy Barron: Well, I think the first thing is what not to do and that’s to be sidetracked by some of the catchy tickers, which, by the way, we also have one – ASX: GOOD, that’s GOOD, and that invests in our sustainable credit fund. But as tempting as it is to be to attracted to the catchy tickers, I think what’s more important is looking at the diversification that that ETF provides and the management style. So whether they are active or passive. And when I’m talking about diversification, why I focus on that being essential is because it spreads your risk across companies and across sectors, so financial, healthcare, resources across regions. So the Australian market is great, but perhaps there’s also good opportunities in the US or even in emerging markets. And the thing is, it’s a bit like Goldilocks, some are a little bit too broad and some are a little bit too narrow and what we’re trying to find is the sweet spot in the middle, so achieving the right mix is different for everybody and it depends on your specific diversification needs. What I mean by that is if you have $100, is your focus to grow that $100, is your focus to generate income from that $100 or are you in pure defensive mode and you just want to make sure that your $100 is worth $100 in three years, five years, seven years time, depending on whatever your time horizon is. And if I give you a good example of that, our Janus Henderson Tactical Income ETF, which trades under the ticker ASX:TACT, can be particularly valuable in uncertain times because it sits in the defensive part of a clients’ portfolio. Look, in addition to diversification, it’s really important that investors consider whether the management style is active or passive, with an active ETF you have a professional investment manager that is making the decisions on your behalf, and that’s something that might be hard for individual investors to replicate – that knowledge, that expertise. When you’re considering an active ETF provider, I would encourage you to look at their experience and their track record.

Matthew Bullock: Before we go any further, is it fair to say that active ETF’s have a similar investment approach to manage funds then?

Amy Barron: Absolutely, yes it is. But if we take a step back, Matt, and if we look at why people even like shares. So why people like shares is because they think they’ve got great growth potential or they can make money from the share market, and unlike their investments in real estate, their home or an investment property, shares have great liquidity and they’re continuously priced. So people get a really good gauge whether they are performing or not. So that’s the first reason people like shares. And then why do people like managed funds? Because there is an investment professional making the decisions for them, so active ETFs provide the best of both worlds in this regard. It’s a great way for investors to experience a manager without requiring the minimum investment requirement or the lengthy application forms that often come with managed funds. So ETFs generally have a very low minimum initial investment amount and they can be easily purchased through their online brokering account, whether that’s CommSec or Nabtrade, or via their financial adviser.

Matthew Bullock: So I’d like to continue with your point on active management and talk a little bit about passive versus active ETFs. Often people think passive when they think of ETF, so what exactly is active management in the context of ETFs and how does it differ from a passive ETF?

Amy Barron: OK, so that we’re all on the same page, let me just articulate the way a passive ETF is set up. So a passive ETF, follows an index or a benchmark. If I use the ASX 200 as an example of that because I think a lot of our listeners or viewers today would be familiar with the ASX 200, there are over 2000 companies that are listed on our exchange here and the ASX 200 is simply the top 200 companies according to their market capitalisation. Now that doesn’t necessarily mean that they’re the 200 best companies for growing or they’re the 200 best companies for providing income, it’s just their market capitalisation and what happens is every three months that ASX 200 is reviewed and rebalanced, and then the passive ETF provider will simply remove the stocks that have come out of the 200 from their investment and they’ll add in the stocks that have gone into the 200, whether they think it’s a good idea or a bad idea, and ultimately the performance of a passive ETF will simply follow the performance of the market. So an active ETF on the flip side, has the advantage of a professional fund manager analysing the individual stocks that are available for them to invest in, and I think a good example would be if a portfolio manager is looking at a company’s debt levels and their ability to service that debt and how a rising or falling interest rate environment will impact them. Another way of looking at it is a portfolio manager might consider how much a company is reliant on exports or generating their income from offshore, and the impact that a tariff would have on a company like that, so after the portfolio manager has analysed these interest rates tariffs, there are a number of other reasons that they can form their opinion. They then decide whether they should increase or decrease their position in those companies, whether they should start, maybe they don’t even own some of the companies in the first place, or whether they should exit the position altogether. They are not forced to hold any particular company, and ultimately, if the markets move quickly, which we all know they can, a professional portfolio manager can reallocate quickly so they can move your money around on your behalf. Ultimately, what they are trying to do is outperform what the broad index is doing.

Matthew Bullock: So we’ve spoken a little bit about what to look for when selecting an ETF, but conversely, what are some of the common mistakes that investors can make when looking at ETFs and most importantly, how do investors avoid those mistakes?

Amy Barron: I think the number one thing is if you ignore diversification. Owning multiple ETF doesn’t necessarily mean that you have sufficient diversification. It’s always sage to take a look at the risks and how they’re spread across sectors, asset classes and regions. I’d say the second mistake is skipping defensive assets altogether. It is quite tempting to go all in on shares, particularly if you’re a new investor because historically the share market is where you’ve seen those really great returns, so people can be tempted to go all in on shares and ignore defensive assets altogether. But a great example of a defensive asset is the Janus Henderson ETF under the ticker, CBOE:JFIX, which invests in a diversified portfolio of bonds, so bonds issued by the federal government, the state government, high quality Australian corporates and a bond ETF will aim to smooth out your portfolio when economic volatility enters the market. And then I think the third thing is having a short-term mindset, so it’s critical to avoid the trap of investing for the short term only, we have seen successful ETF investors hold on tight and ride out the volatility during turbulent times and just remain focused on their longer term goal, which is typically 3, 5, 7 years.

Matthew Bullock: So now Amy, looking forward, what do you see emerging as the key trends for the rest of 2025?

Amy Barron: Thanks, Matt. Well, from our perspective, 2025 is shaping up to be the beginning of a new chapter for fixed interest as an asset class in Australia, we’re seeing renewed interest particularly for active fixed interest solutions because investors are looking to strengthen their portfolio in today’s really complex market, and if you’re wondering why, it’s worth highlighting that the bond markets are far larger in size and far less efficient than the share market, and what that size and inefficiency does is it creates opportunities for an active fixed interest manager to find the gaps and invest accordingly. Now with interest rates where they’re at today, Australian fixed interest ETFS can really help provide an attractive overall total return because they’re offering access to income generating opportunities at an attractive fee.

Matthew Bullock: So Amy, unfortunately we’re out of time, but I want to thank you very much for all of your thoughts on ETFs, it’s been very interesting, but also to thank our audience for listening. And of course, if you have any questions to do with Janus Henderson’s investment views or if you have any other questions, then please don’t hesitate to contact your client relationship manager or to visit our website. So with that, thank you very much and I wish you a very pleasant rest of the day.

Amy Barron: Thanks Matt.