Many people encountering active ETFs for the first time share a common concern: if fund managers can adjust holdings every day, will the product gradually lose its original character? For instance, a product initially positioned as large-cap value might see a growing number of tech stocks over time, or a product targeting dividend and low volatility might experience increasing portfolio swings.

This is where two concepts must be clearly distinguished: normal rebalancing is not the same as style drift. Today we examine what exactly changes in an active ETF, and what should never change arbitrarily.

Rebalancing is the "change" inherent to active management

The active nature of an active ETF means fund managers can adjust the portfolio based on market shifts. It is like driving a car: when road conditions change, you can take a different route; when valuations change, you can adjust position sizes; when a company's fundamentals change, you can reselect holdings. The ability to adjust is precisely the point of active management.

Therefore, seeing holdings change does not necessarily mean style drift has occurred. What truly deserves attention is whether the adjustments have exceeded the product's original investment framework.

Consider an example: a product positioned toward large-cap value sees its manager reduce certain value stocks whose valuations have become elevated, while adding other companies that fit the value strategy. That is normal rebalancing. But if a product originally emphasizing value style gradually shifts significantly toward high-volatility growth stocks clearly different from its original positioning, then it warrants attention as to whether style deviation has emerged.

One way to remember it: rebalancing simply swaps out the actors; style drift replaces the entire script.

Style is the anchor of a product's positioning

The biggest problem with style drift in active management products is that it forces investors to bear risks beyond their expectations. When investors buy a fund, they are not just purchasing the current holdings; they are choosing an investment approach they can accept.

Active ETFs can have multiple different portfolio styles. If you choose a product tilted toward dividends and low volatility, you are likely seeking relative stability. If you choose a growth style, you may be focused on the investment opportunities brought by corporate growth.

If a product's investment style changes markedly, the risk characteristics facing investors may also shift accordingly. More importantly, style changes often do not happen overnight. Buying a little more tech today may seem insignificant; buying a bit more over time, and after several quarters, the portfolio's sector and style composition may have already undergone noticeable changes. Therefore, style should be assessed over a period rather than on any single day.

Three safeguards that keep active management disciplined

Since active ETFs can adjust holdings, does that mean fund managers can buy whatever they want? Certainly not. Active management also has its boundaries.

1. Products operate according to their prospectus. A product's investment objectives, scope, and strategy are specified in legal documents such as the fund contract. Fund managers can adjust flexibly within this framework but cannot arbitrarily change the product's basic positioning.

2. PCF makes holdings more transparent. A key feature of active ETFs is that the PCF list discloses portfolio information. For ordinary investors, it is like a report card: without waiting too long, regular check-ins reveal roughly what the fund has been buying recently. Of course, PCF reflects holdings at the disclosure point in time and does not mean the manager will necessarily continue holding those stocks. Thus, the more important thing when reviewing PCF is to observe the portfolio's overall direction and trends of change.

3. Regulatory constraints. Active ETFs are not unconstrained free stock picking. Products must also comply with relevant regulatory rules regarding the number of holdings, concentration, liquidity, turnover, and other aspects. Taking portfolio diversification as an example, regulations explicitly require holding no fewer than 30 securities, with the top ten holdings not exceeding 60% of the fund's net asset value in total. So active does not mean arbitrary. Fund managers have the freedom to adjust the portfolio, but that freedom operates within a rules-based framework.

Three simple steps for beginners

To judge whether an active ETF has undergone a significant style change, simply look at three things.

1. Check the product's birth certificate. Start by reviewing the investment objectives and strategy in the fund contract to understand what it was originally designed to do.

2. Track PCF trends. Over time, compare whether the portfolio's main sectors have changed noticeably. Has the holding direction persistently tilted toward a certain asset class? A one-time adjustment is normal; sustained and significant changes deserve more attention.

3. See how periodic reports explain things. If portfolio changes appear substantial, consult periodic reports to see how the fund manager explains investment operations and portfolio adjustments. If the product's actual performance has clearly deviated from the reasons you originally chose it, you may also reconsider: is it still the fund I wanted?

The active in active ETF means the portfolio can change with the market and research judgments. But having changes does not mean lacking discipline. For investors, the real question is not: why did it swap a stock today? Rather: after all these changes, is it still the same one I originally chose?

Active E-Point opens new investment horizons!

Risk disclosure: The views are for reference only and will change with market conditions; they do not constitute any investment advice or commitment. The product mentioned is an equity fund, a type of securities investment fund with relatively high expected risk and expected return; its expected return and risk level are higher than those of mixed funds, bond funds, and money market funds. To purchase related fund products, please carefully read the fund's Fund Contract, Prospectus, and other legal documents, and choose products matching your risk level. Funds involve risk, and investment requires caution.