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
