For the average investor, active management is often simplified to "stock selection." A fund manager picks stocks that go up, and the fund’s net value rises accordingly; if the picks are wrong, losses follow. However, active management in the real world is far more complex than just choosing stocks, and the management of active ETFs is not merely about stock selection. For example, even if a stock is accurately predicted to rise 50%, if its weight in the portfolio is only 1%, its contribution to the net value is just 0.5%. Conversely, even with a correct judgment, different purchase prices, holding weights, and holding periods can lead to vastly different outcomes. Therefore, understanding active management requires breaking down its complete investment process: from strategy formulation and asset selection to portfolio construction, dynamic adjustment, and risk management. As a vehicle for active management, the value and risks of active ETFs are embedded within this entire framework.

Starting Point of "Active" Management: Strategy-Based Asset Selection

The first step in active investment is not guessing short-term price movements, but screening assets that meet specific criteria from the investable universe within an established strategic framework. The starting points of different strategies differ fundamentally. For instance, growth strategies focus on a company's future revenue and earnings growth potential, accepting a premium for growth. Value strategies emphasize the alignment between current valuation and intrinsic value, favoring assets that the market undervalues. Quality strategies prioritize earnings stability, cash flow quality, and balance sheet health. Quantitative strategies use statistical models and algorithms to identify targets with excess return potential from large datasets. The same company might be considered a quality target in a growth strategy but excluded in a value strategy due to high valuation. Therefore, the first step of active management is translating research judgments into specific investment choices that align with the established strategy logic. Different strategies naturally yield different answers—this is not a matter of right or wrong, but a difference in investment philosophy.

Building the "Active" Portfolio: Weight Allocation Is More Challenging Than Stock Selection

After completing target selection, the fund manager faces a more complex question: what weight should each target receive? Suppose a portfolio holds both stocks A and B, with A at 2% and B at 10%. If both stocks rise 20%, A contributes 0.4% and B contributes 2% to the portfolio—a fivefold difference. Clearly, even with correct direction, weight allocation directly determines the final return level. The core of portfolio construction lies in managing the balance between concentration and diversification. On the surface, holding ten stocks across different industries might seem sufficiently diversified, but if these companies' earnings drivers are highly correlated—for example, all influenced by the same macroeconomic variable or industrial policy—the portfolio still bears concentrated risk exposure. Therefore, portfolio construction requires attention not only to "what to buy" but also to "how much to buy" and whether there are unrecognized correlation risks among the weights. This explains why "correctly identifying individual stocks" does not equate to "the fund making money." Returns from active investing come from the collective performance of the entire portfolio, not the rise or fall of a single holding.

Dynamic "Active" Adjustment: Continuous Monitoring and Rebalancing

Once the portfolio is established, management does not end. A company's operational status, market price levels, and industry competitive landscape are constantly changing, and the original investment logic must be continually tested. Triggers for dynamic adjustment typically include: 1) fundamental changes—such as earnings versus expectations, management changes, or shifts in industry policy; 2) valuation changes—after a significant price rise, a previously reasonable valuation may become overextended, reducing its attractiveness; 3) changes in portfolio structure—when a particular sector or stock rises too much, its weight in the portfolio may passively increase, deviating from the initial setup, requiring rebalancing to restore the target allocation; and 4) new opportunities—when alternative targets that better fit the strategy logic emerge. It is important to note that dynamic adjustment is not synonymous with high-frequency trading. Every buy or sell incurs transaction costs, and large trades may impact market prices. Turnover rates naturally vary across strategies—long-term holding strategies and trading-oriented strategies should not be directly compared in rebalancing frequency. The appropriate frequency of rebalancing should be judged by whether it aligns with the strategy logic, not by "diligence."

Risk Management: The Inseparable Other Side of Active Management

Investors often interpret active management as "seeking more return opportunities," but professional active management equally encompasses systematic risk management. Its core lies in identifying, measuring, and controlling the various risks borne by the portfolio. Common risk management considerations include: 1) Industry concentration control—after a certain sector rises continuously, its weight in the portfolio may rise passively from an initial 8% to 20%. Even if the strategy remains bullish on the sector, the manager must assess the drawdown risk posed by excessive concentration. 2) Identification of risk factor exposure—two seemingly unrelated companies may both be significantly influenced by interest rates, exchange rates, or specific commodity prices. If only the stock names are considered while ignoring common risk factors, so-called diversification may be merely superficial. 3) Liquidity risk management—under extreme conditions, certain holdings may face liquidity contraction, impairing the portfolio's adjustment capability. Additionally, tool usage within active management is becoming increasingly diverse. In 2024, approximately 39.85% of U.S. active ETFs held equity derivatives, with derivatives accounting for about 2.6% of their holdings by count, while for passive ETFs this proportion was less than 1%. Derivatives may be used for hedging, capital efficiency, or expressing specific views, but their presence alone does not indicate that a product has higher risk or better returns. The key is whether these tools serve the established investment strategy and risk management objectives.

Re-examining Active ETFs: Focus on the Strategy System, Not Individual Stock Movements

Based on the analysis above, the complete chain of active management can be summarized as: Research → Strategy Formulation → Asset Selection → Portfolio Construction → Dynamic Adjustment → Risk Management. Each step in this process constitutes an indispensable part of active management. If investors only focus on which stocks the fund manager recently bought, they capture only a minimal slice of the entire "active" system. What investors should truly focus on are the following three levels of questions: 1) Clarity and consistency of the strategy—does the product have a clear investment strategy? Are the actual holdings consistent with the strategy over the long term? 2) Reasonableness of portfolio construction—what is the concentration level in industries and individual stocks? Does the risk exposure match the product's positioning? On this issue, industry regulations have already set a fundamental "baseline" for active ETFs: active ETFs must meet minimum diversification requirements, including holding no fewer than 30 stocks, and the combined investment proportion of the top ten stocks must not exceed 50% of the fund's net asset value. And 3) Effectiveness of risk management—under extreme market conditions, does the product have the expected drawdown control capability? The ETF mechanism addresses operational-level issues such as trading convenience, fee structure, and transparency. Investment outcomes, however, ultimately depend on the effectiveness of the strategy, the manager's execution capability, and market conditions—these should not be conflated. The significance of active ETFs lies in placing active management within a more transparent and efficient product vehicle, but the advancement of the vehicle does not alter the complexity of active management. For investors, understanding the complete framework behind "active" management aids rational allocation decisions far more than chasing a single heavy holding.

Risk Disclosure: The views expressed are for reference only and will change with market conditions. They do not constitute any investment advice or commitment. The products mentioned are equity funds, belonging to securities investment funds with relatively high expected risk and return. Their expected returns and risks are higher than those of hybrid funds, bond funds, and money market funds. Before purchasing any related fund products, please carefully read the fund's "Fund Contract," "Prospectus," and other fund legal documents, and choose products that match your risk level. Funds carry risks; investment requires caution.