Let's look at active ETFs and how they differ from their passive counterparts, as well as the implications of their operational structure. Active ETFs, or actively manage exchange traded funds, operate similarly to traditional ETFs in that they are traded on stock exchanges offering the same intraday liquidity and trading flexibility. However, a key difference lies in their objective. Active ETFs aim to outperform a benchmark index rather than merely replicate it. This distinction introduces unique features and complexities. Unlike passive ETFs, which typically disclose their portfolio holdings daily active ETFs may not reveal their exact holdings every day. This limited disclosure is designed to protect the ETFs active management strategies from being reverse engineered by competitors or market participants. Instead, authorized participants or APS involved in the creation and redemption process might receive a representative basket of securities. This basket is carefully designed to approximate the risk and return profile of the ETF's actual holdings without disclosing its precise composition. While this approach maintains the confidentiality of the ETF strategy, it can also introduce operational challenges. Since authorized participants or APs are working with representative baskets, rather than the exact holdings, the arbitrage process, which helps keep the ETF's market price aligned with its net asset value or NAV, this may be slightly less precise. This can lead to wider bid-ask spreads or minor deviations between the ETF's market price and its NAV, especially during periods of heightened market volatility.

Additionally, constructing and managing representative baskets that accurately reflects the performance and risk of the full portfolio requires significant expertise and adds complexity to the fund's operations. This extra layer of intricacy often translates into higher expense ratios for active ETFs as compared to passive ETFs. As the management costs for active strategies tend to be greater.