Actively Managed ETFs Are Giving In to the Price War—To the Benefit of Investors

Key Points

• Actively managed ETFs are increasingly adopting lower fees, challenging the traditional assumption that passive index funds are always the cheaper option.
• Funds like DFLV, DFAC, and USMC offer competitive expense ratios, but comparable passive alternatives such as VTV, VTHR, and MGK often remain cheaper with similar performance.
• Investors should weigh factors beyond fees, including asset size, trading liquidity, and year-to-date returns, before choosing active funds over passive counterparts.

The value proposition of exchange-traded funds (ETFs) has long been simple: pay a very modest fee for the ease of a ready-to-buy portfolio of stocks that are accessible with a single trade and that are rebalanced and maintained by someone else.

Most often, this has meant passive funds tied to an index and rebalanced every quarter or so. However, actively managed funds—those that are generally not linked to an index but rather consist of portfolios maintained by professional managers, which typically lead to higher costs for investors—are upending some of these long-standing assumptions by charging low fees.

Competition in the ETF space is fierce, and the number of new funds emerging—as well as the amount of money being poured into them—is significant. This has previously led to a price war among passive funds, resulting in some of the biggest and most popular ETFs costing next to nothing. Now, actively managed funds are in a similar situation. Still, investors should keep in mind that actively managed funds are not automatically the best choice; some are just cheaper than before.

DFLV: Relatively Low-Cost Value Fund, But Outperformance May Not Be Worth the Trade-Off

The Dimensional US Large Cap Value ETF NYSEARCA: DFLV holds a broad collection of 337 large-cap value stocks. With an expense ratio of 0.21%, the fund is quite a bit cheaper than alternative actively managed funds with a similar focus, such as the JPMorgan Active Value ETF NYSEARCA: JAVA, which has an annual fee of 0.44%.

DFLV does not sacrifice portfolio breadth for its lower cost, and it remains well-diversified overall, with about a quarter of total assets in the 10 largest positions.

The question for investors is whether DFLV is worthwhile in comparison to a low-cost passive fund focused on value stocks. The Vanguard Value ETF NYSEARCA: VTV, for instance, has a comparable number of holdings but costs only 0.03% each year. This cheaper alternative also has more robust assets under management and trading volume than DFLV.

It may come down to performance: DFLV has returned about 21% year to date (YTD), while VTV is up 18% over the same period. The difference may not be enough to warrant the higher cost, even though DFLV may have a more compelling fee than some other active funds in the space.

DFAC's Advantages Lie in Performance and Liquidity

A proxy for the broader U.S. equities market, the Dimensional U.S. Core Equity 2 ETF NYSEARCA: DFAC could be compared against passive alternatives like the Vanguard Russell 3000 ETF NASDAQ: VTHR. Across more than 2,300 holdings representing all market capitalizations, DFAC leans most heavily into information technology, financial, and industrial companies.

The net expense ratio of DFAC is 0.18%, which is quite low compared to many actively managed funds but substantially higher still than major U.S. equities funds. VTHR, for instance, has an annual fee just a third of what DFAC charges.

One key advantage for DFAC over VTHR, however, is its notably larger asset base and higher trading volume, which will make liquidity less of a concern. In terms of performance, the two alternatives are close to one another: DFAC has returned 13% YTD while VTHR is fairly close behind at 11%. More active traders may prefer the liquidity advantages of DFAC, while buy-and-hold investors may be willing to sacrifice some liquidity and marginal returns for a lower fee with VTHR.

USMC: A Mega-Cap Niche With a Low Fee, But Cheaper Alternatives Exist

The actively managed fund with the lowest annual fee on our list, the Principal U.S. Mega-Cap ETF NASDAQ: USMC costs investors just 0.12% per year. The fund aims to counter some indexes that underweight mega-cap companies in favor of large-cap firms. The fund's relatively focused portfolio of 54 holdings may be a complement to core large-cap ETFs.

USMC has an asset base and trading volume more on par with DFLV than DFAC, but the returns of 10% YTD and the low fee may help to offset that.

Even so, the fund is not the cheapest option in the niche mega-cap space, so investors will want to compare it with lower-cost alternatives like the Vanguard Mega Cap Growth ETF NYSEARCA: MGK to determine whether the returns justify the somewhat higher fee.

It's worth noting as well that many of the companies in USMC's basket are well represented in other ETFs with a variety of strategies and approaches, so the fund may be most useful for investors lacking exposure to this corner of the market in other investments.