Exchange-traded funds (ETFs), like mutual funds, provide access to a professionally managed basket of pooled securities, like stocks or bonds. But ETFs differ from mutual funds in several ways. Generally, ETFs are more tax‑efficient and can offer streamlined expenses.

As investors evaluate their investment objectives, it’s important to understand the potential benefits these products can provide. There are a number of misconceptions and myths about ETFs. Misunderstanding the structure or role of an ETF could lead some investors to miss out on a valuable addition to their portfolio.

With this in mind, here are six of the most common myths regarding ETFs:

Myth 1: All ETFs are based on passive strategies

When they were first developed, ETFs were strictly passive vehicles. Increasingly, though, more ETF offerings are actively managed, and there are now a variety of strategies available to investors across equity and fixed income asset classes.

Myth 2: Passive ETFs are safer than active ETFs

We believe that the level of risk depends on the underlying investments and not whether an ETF is passively or actively managed. That said, most active managers have the flexibility to conduct research and attempt to anticipate risks. Applying their professional experience and judgment when making security selections, active managers look for specific sectors or companies with greater upside potential and seek to avoid those with inappropriate downside risk. This approach is not possible with passive ETFs, which seek to track the stocks or bonds held in an index.

Myth 3: Active managers can’t outperform index funds or passive ETFs

While all active managers strive to outperform their benchmarks, we believe those with global resources and research platforms may have an advantage leveraging their capabilities and experience. At the same time, economies of scale can help to keep fees and expenses in check.

Myth 4: ETFs are only for short‑term trading and market timing

Although they can be bought and sold throughout the day without trading frequency limitations, ETFs are often intended for use over longer‑term investment horizons. With fewer operational expenses than some other financial instruments, ETFs can be a cost‑effective way to maintain exposure to various investment strategies over longer periods.

Myth 5: ETFs should have full daily transparency of their underlying holdings

Full daily transparency was originally viewed as necessary for an efficient ETF‑trading process. However, the industry has evolved, and there are now several ways for ETF strategies to operate efficiently while maintaining a level of trading confidentiality. For some ETFs, shielding their investment‑related intellectual property can be important to prevent outside investors and competitors from using the information in a way that may be detrimental to performance. However, not every investment strategy requires such shielding. For example, because of the way bond markets work, it’s unlikely that competitors can gain a detrimental trading advantage by knowing the holdings of certain fixed income strategies.

Myth 6: ETFs with low daily trading volume are not liquid

An ETF’s daily trading volume is not necessarily an indication of how liquid it is. Instead, it may be more informative to look to an ETF’s underlying holdings when assessing liquidity. With holdings based in highly liquid markets, such as U.S. large‑cap stocks, ETFs with low historical daily trading volumes can accommodate significantly higher volumes without causing major price swings. As a result, if the underlying holdings are highly liquid, the ETF should be liquid, as well.

Conclusion

Contrary to the myths, active ETFs can play an important role in investor portfolios. Supported by fundamental research and managed by experienced professionals with a focus on security selection and careful attention to risk, we believe active ETFs could provide investors the opportunity for enhanced gains and the potential for appropriate downside risk management.

For more information, please call 1‑877‑561‑7670 or visit troweprice.com/ExploreETFs.