Why ETFs: examining the landscape

Please consider a Fund’s objectives, risks (including risk of loss), charges and expenses before investing. For these, see the prospectus and summary prospectus at bailliegifford.com/etfs. Please read these before investing. Securities are offered through Baillie Gifford Funds Services LLC, an affiliate of Baillie Gifford Overseas Limited and a member of FINRA.

Examining the ETF landscape

Historically, most exchange traded funds (ETFs) have been passive. But that’s starting to change, with more and more active ETFs coming to market. The growth in active ETFs is largely the result of traditional fund managers realizing that the ETF is a great wrapper and investment vehicle for a broad range of strategies. The result is that investors have more choice than ever before.

Active vs. passive ETFs defined

Passive ETFs are designed to track a particular index or sector – and, hence, do not aim to ‘beat the market.’ Rather, they tend to own a basket of securities (based, for example, on market capitalization). The buying, selling and rebalancing process for these strategies is based on a specific set of rules outlined in the product’s methodology.

While they can be rebalanced occasionally if, say, an index is altered, they don’t engage in buying or selling for the purpose of generating excess returns.

Active ETFs, by contrast, are designed with the goal of outperforming a benchmark index or sector. Helmed by professional fund managers, these ETFs may employ a proprietary mix of investment strategies to inform buy and sell decisions. Ideally, an active ETF will deliver ‘alpha’ to investors, that is, a risk-adjusted return that beats a given benchmark.

Why investors might choose either an active or passive ETF

Both styles of ETFs may have a place in investors’ portfolios. Passive ETFs might be the right choice for investors who seek index-like returns and prioritizes very low fees. Meanwhile, investors may gravitate toward active ETFs due to a desire to outperform the market – and a belief that their ETF is led by professional managers with the ability to do so.

Differences in benchmarking: active vs. passive ETFs

Active ETFs have more flexibility to choose their reference benchmark or even to choose multiple benchmarks. Active ETF managers can then use the securities and financial instruments within their stated strategy to attempt to outperform their benchmark(s). Conversely, passive ETF managers can choose a specific method to track their one benchmark. Their selection methodology can be full replication, optimization or synthetic replication.

• Full Replication: The ETF holds every security at the same weight as in the benchmark index.
• Optimization: When an index includes more constituents or difficult-to-trade constituents than the ETF can handle in terms of trading costs, the ETF will hold an optimized sample of the index in terms of costs, correlations and exposure.
• Synthetic Replication: The ETF does not buy the underlying securities of its index and instead uses derivatives to swap the performance of the index for a defined fee. Full disclosure happens on a monthly basis.

Almost all passive fixed income ETFs use an optimization approach because most fixed income indexes hold thousands of bonds that may or may not have traded recently. The fixed income portfolio manager will utilize a more liquid sample of the bonds to replicate the desired performance.

Mutual Fund and Separately Managed Account conversions to ETFs

The popularity of ETFs among investors shows no signs of abating. As a result, some mutual funds, as well as separately managed accounts (SMAs), are converting to ETFs. Conversions allow for active management offered in a form that can be more tax-efficient, more liquid, more transparent, more accessible (intraday trading can be purchased on a simple brokerage app) and potentially with lower fees than mutual funds or SMAs. Converting is not without its hurdles, however. The switch from a mutual fund or SMA to an ETF involves operational challenges, significant communication with investors, and in some cases, shareholder approval.

The scope of ETFs has broadened considerably in recent years. Investors can still access a wide range of passive vehicles, but now have the choice of adding active ETFs to their portfolios. To help ensure you own the ETF that best fits your objectives, understanding the nuances behind the different products is a must.

Key benefits of ETFs

There are many great investment tools available for investors to reach their objectives. Choice, as every consumer knows, is wonderful, but understanding the various options is important.

For millions of people the right option continues to be ETFs. From humble beginnings in the 1990s, ETFs have become a veritable juggernaut in the world of investments. The exchange traded fund is a transformational vehicle, and its crucial benefits have won over both individuals and institutions alike.

Diversify your portfolio

We’ve all heard the adage, ‘Don’t put all your eggs in one basket.’ In an investment context, this advice speaks to the importance of being properly diversified. Diversification can enhance risk-adjusted returns over time, protecting a portfolio against a sharp drop in one holding or asset class.

Exchange traded funds can offer compelling benefits in terms of diversification. From an asset allocation standpoint, owning ETFs can complement and augment the other building blocks of an investor’s portfolio—whether that’s cash or cash equivalents, individual securities (equities or fixed income), or alternative investments (e.g.private equity, hedge funds, real estate, etc.).

Meanwhile, exchange traded funds allow for diversification because they offer investors access to such a wide range of stocks and bonds.

There are ETFs that seek to track broad market indices (such as the Nasdaq- 100®), strategies that complete parts of a portfolio such as value, growth, or income, as well as funds that focus on specific countries or sectors. Each investor can buy the mix of ETFs that helps to meet their unique needs and objectives.

Individual and institutional investors can also choose from passive and active exchange traded funds. Passive ETFs buy and hold a basket of securities, which are typically representative of an index, sector, or country. Unlike, say, a traditional active mutual fund, a passive ETF does not have portfolio managers who aim to buy certain securities (and avoid others) in a quest for outperformance.

These types of ETFs often sport ultra-low fees, as the fund provider doesn’t need to maintain expensive teams of analysts and portfolio managers.

While passive funds still dominate the ETF space, investors now have increasing access to actively managed exchange traded funds. These function in the same way as traditional (i.e. passive) ETFs but have professional managers at the helm buying and selling in a bid to outperform an index or other benchmark. Active ETFs do tend to come with somewhat higher fees, but they also have the potential of outperforming their benchmark.

Easy access

One feature that has made ETFs so popular is their ease of access. Anyone with a brokerage account (whether it’s self-directed or through an advisor) can buy and sell ETFs. Indeed, with online trading, this can literally be done with the click of a few buttons.

Exchange traded funds are accessible in another way as well: there’s no minimum purchase. This makes them ideal for individuals who are just starting to build a portfolio. Mutual funds, on the other hand, typically require a minimum investment.

Intra-day trading

Another advantage of ETFs is that you can buy and sell them throughout the trading day. So, while we don’t recommend attempting to time the market, you do have the ability to respond to market changes as they happen. Intra-day trading is also crucial because it allows investors to buy and sell a holding instantaneously. This allows you, for instance, to quickly raise funds if you spot another investment opportunity.

You don’t have to wait for the close of trading to know the price you’ll receive, either.

Intra-day trading is available for all ETFs, including those that trade less frequently. For those ETFs, which can have more price fluctuations, it is best practice to use a limit order or wait until after the market has been open for an hour or so.

Tax efficiency

Returns matter for investors, but what really matters are after-tax returns. Fortunately, the way exchange traded funds are designed can help minimize the taxes paid by investors holding the ETF. Without going into too many details, ETFs can engage in ‘in kind’ transactions for their underlying securities, which avoid the realization of capital gains. This may help reduce capital gains taxes payable for those who hold an ETF in their portfolio.

So while investors will still realize capital gains for the increase in their purchase price vs. their sale price, trading activity within the ETF likely won’t have any tax implications.

Price efficiency

Price matters. Whether you’re buying a sweater, a car, or an ETF, you want to feel confident that you won’t pay more than something is currently worth, or sell for less than you could get. The good news is that exchange traded funds have two mechanisms that contribute to the price efficiency. First, each ETF has one or more designated Authorized Participants. These are typically brokerage firms or other trading companies. Authorized Participants may deal both in a given ETF, as well as that ETF’s underlying assets – creating and redeeming units of a fund in the process.

If the market price of an ETF is trading at a discount to its Net Asset Value (NAV)¹, an Authorized Participant (AP) can deliver units of the ETF to the fund’s provider, taking the ETF’s basket of securities in return. On the flip side, if an ETF is trading at a premium to its NAV, an AP can profit by doing the reverse: Buying securities and delivering them to the fund provider in exchange for ETF units. This kind of arbitrage is profitable for the Authorized Participant and brings the market price of a fund in line with its value.

A second layer of price efficiency in ETFs arises due to the actions of what are known as Market Makers. Market Makers are trading firms designated to provide liquidity when required. These firms post bid and ask quotes throughout the trading day, giving prospective buyers and sellers the ability to trade in an ETF. As with Authorized Participants, Market Makers can help arbitrage away any significant premium or discount in an ETF relative to its underlying NAV – buying if an ETF is trading at a discount and selling if it’s trading at a premium.

1. An ETF’s Net Asset Value is the total value of a fund’s assets minus its liabilities, divided by the number of ETF units outstanding.

Transparency: know what you own

A final but still crucial benefit of ETFs is their transparency. In other words, investors know what they’re buying and they know what they’re selling. ETFs differ in the amount of transparency they provide, but in both cases there is sufficient disclosure for someone to make an informed decision.

Fully transparent ETFs publish their complete list of holdings daily. That means the market knows at the end of each trading day which securities an ETF owns – and exactly how many.

Introducing Baillie Gifford’s Active ETFs

Since 1908, Baillie Gifford has sought to identify transformative companies and hold them patiently for the long term. We believe enduring growth opportunities require discipline, imagination, and time.

Now, as investor preferences evolve, we are extending that same philosophy into the ETF format – making our strategies more accessible and flexible for U.S. clients without compromising our approach.

As investors look to achieve exposure in the most efficient manner possible, active ETFs are becoming increasingly essential vehicles in their toolkit.

Despite the abundance of ETF options within broader asset classes, the selection becomes notably limited when seeking an active, growth-focused, bottom-up fundamental equity portfolio with a long-term investment horizon.

Baillie Gifford’s discipline in this philosophy is tailor-made to fit the needs of this particular niche. Our enduring legacy is a commitment to identifying transformative companies and investing in them for the long term. We are packaging these strategies in the ETF wrapper, to help your clients access these distinct growth opportunities through vehicles that provide greater tax efficiency and flexibility when needed – without compromising on the patient, long-term perspective that defines our approach.

Our investment philosophy in an ETF

The ETF wrapper does not change our core approach to investing:

• Active, bottom-up research drives security selection.
• Patience allows companies the time to realize transformational potential.
• Concentrated conviction focuses portfolios on our best ideas.

What changes is accessibility. ETFs let clients tap into our philosophy through a format designed for today’s portfolios.

What we launched

In June 2026, Baillie Gifford launched four actively managed ETFs, spanning emerging markets, international and global growth opportunities:

• Emerging Markets Growth ETF (BGEG)
• International Alpha ETF (BGCG)
• International Concentrated Growth ETF (BGIA)
• Long Term Global Growth ETF (BGGG)

Each fund draws directly from our established research platform, offering continuity of philosophy with the additional benefits of the ETF structure.

Risk factors

The Funds are distributed by Baillie Gifford Funds Services LLC. Baillie Gifford Funds Services LLC is registered as a broker-dealer with the SEC, a member of FINRA and is an affiliate of Baillie Gifford Overseas Limited. All information is sourced from Baillie Gifford & Co unless otherwise stated.

As with all ETFs, the value of an investment in the Fund could decline, so you could lose money.

Investing in Exchange Traded Funds (ETFs) pose additional risks including that shares trade on an exchange and may trade at a price greater than the NAV (a premium) or less than the NAV (a discount). Shares bought at a premium may have a greater risk of loss than those bought at a discount. Shares are bought and sold at market price (not NAV) and are not individually redeemable. Shares may only be redeemed directly from the Fund in Creation Units by Authorized Participants (APs). Where an ETF relies on a small number of APs, there is a risk if these APs exit the business or are unable to create or redeem shares. In this situation, Fund shares are more likely to trade at a premium or discount to NAV and could face trading halts. Although shares are listed for trading on an exchange, there can be no assurance that an active trading market for the shares will develop or be maintained. Investors buying or selling shares in the secondary market may also incur bid-ask spreads, which represent the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept for shares and may widen during periods of market volatility or reduced liquidity. Brokerage commissions may apply and will reduce returns. The market price of shares may fluctuate in response to changes in the value of the Fund’s holdings, supply and demand for shares and other market factors. For more information about these and other risks of an investment in the Fund see “Principal Risks” in the prospectus.

There can be no assurance that a Fund will achieve its objective.

This communication was produced and approved in May 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

The images used in this communication are for illustrative purposes only.

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