Active exchange-traded funds combine an ETF structure with active management strategies, aiming to outperform benchmarks or enhance ESG1 profiles. Our comprehensive investors’ guide to active ETFs explains how these innovative investment vehicles are transforming the market with their unique blend of active management and the advantages of ETFs.

Key factors driving the rise of active ETFs

Active ETFs – Definition and structure

Active ETFs hold portfolios selected by fund managers rather than replicating market or sector indices. They often seek to outperform benchmarks or improve ESG characteristics while maintaining a low tracking error. These funds operate under the well-established UCITS2 regulatory framework. They are gaining popularity thanks to their transparency, cost efficiency, and ease of trading compared to mutual funds.

Market size and growth

Active ETFs represent about 2.5% of the $2.3 trillion European ETF market3, with growth and inflows outpacing passive ETFs. Fixed-income active ETFs in particular have expanded due to the improved liquidity and trade execution they offer investors. 

Combining active management benefits and ETF advantages

The benefits of active ETFs include lower fees than those for mutual funds, intraday trading, daily transparency, and ease of access. Most active ETFs aim for a low tracking error to balance performance and risk.

Investor profile and usage

Institutional investors and multi-asset managers use active ETFs as cost-effective building blocks to add active or thematic tilts such as ESG exposure, or to generate alpha within diversified portfolios.

Selection criteria for an active ETF

To select an active ETF, investors should focus on elements including an evidence-backed investment strategy, transparent back-testing, portfolio diversification, modest turnover to limit costs, and exposure to multiple style factors. ETFs that implement these criteria should see consistent performance across market conditions. 

Generating alpha

One of the objectives of active ETFs is to generate alpha (excess performance) above the benchmark. Our active multi-factor quantitative strategies, e.g., try to do this by focusing on quality, value, low risk, and momentum. 

Enhancing ESG profiles

By overweighting higher-scoring companies and incorporating proprietary ESG data and engagement, our active ETFs can help investors meet sustainability thresholds and decarbonisation targets while minimising tracking error relative to benchmarks. 

Read our investors guide to active ETFs and discover how to enhance your investment portfolio with cutting-edge insights and active ETF strategies.

[1] Involving environmental, social and governance criteria  

[2] An Undertakings for Collective Investment in Transferable Securities fund complies with European Commission regulations for funds sold throughout the EU https://www.investopedia.com/terms/u/ucits.asp   

[3] 2025 ETF Trends: Shaping market growth and innovation | EY – Global

Disclaimer

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.