Opportunities that Active ETFs Offer

In addition to just outperforming the benchmark indexes, actively managed Exchange Traded Funds (ETFs) offer some other opportunities to traders, both individual and institutional. These opportunities emerge from the fact that ETFs have high transparency and have to disclose their holdings on a daily basis and they can be intraday traded.

1. Copying and Front running – Actively managed ETFs reveal ETF holdings with the help of talented money managers. Any investor who closely follows the ETF can thus use the changing ETF composition to managing his own portfolio. Likely institutional traders and other big players of the market can use this info to their own advantage; this strategy is called front running.
2. Arbitrage opportunity – this is for institutional level traders. Whenever there is a variation in relationship of ETF price and underlying asset price, there is a chance of arbitrage. This strategy is based on the fact that ETF shares can be sold in two ways, one on open market and the other to the ETF firm in exchange for the underlying asset. For selling back to the ETF firm there should be a large block of ETF shares called creation units.
3. Intraday trading opportunities – Actively managed ETFs usually involves trading throughout the day. This can create intraday trends and price movements, which indirectly can help short-term traders like day traders and scalpers.

Many ETF firms are seriously concerned about this increased transparency and are making trades one in a day or week. Also the portfolio holdings are disclosed after the market close. This can greatly reduce front running.

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