Education Corner


What are active ETFs?

Active management combined with the benefits of the ETF wrapper

Education corner / Investing / What are active ETFs?


ETFs have always been associated with passive investing. Ever since the first exchange-traded fund in the US was launched in 1993, the majority of focus has been on rules-based indexing strategies, however, over the past few years, this demand has started to change.


In the past, the term ‘active ETF’ has been viewed as somewhat of an oxymoron. While ETFs have been associated with passives, active investing has always been viewed through the lens of mutual funds which were first created in 1924 in the US.

 It is important to remember that ETFs are just a wrapper meaning they are simply a piece of technology that asset managers can harness to place a wide variety of strategies into the structure, be they active or passive.

Like with regular active mutual funds, active ETFs are attempting to outperform their respective benchmark by making specific investment decisions that will deliver stronger returns over the long term.

This search for alpha is the key difference between active and passive ETFs, the latter of which is simply looking to track the performance of the underlying index, rather than outperform it.

Actives and fixed income

This is particularly prevalent in the fixed income space, for example, where passive ETFs typically give larger weightings to the most indebted companies which is seen as a potentially inefficient method of index calculation.

On the other hand, active fixed income ETFs can weigh up each individual issuer and give the largest weightings accordingly. 

Advantages of ETFs

Furthermore, active ETFs can take advantage of the benefits of the ETF wrapper, most notably the daily transparency of holdings, intraday trading and the extra layer of liquidity ETFs have by trading on the secondary market. 

Overall, the liquidity profile of any ETF – including actives – is primarily driven by its underlying securities while tight ETF spreads are a result of volume, velocity and diversity of the investor base. 

Growth of active ETFs in Europe

The first active ETF in Europe was launched in 2008, eight years after Merrill Lynch unveiled the first European-listed ETF, with the growth of the market slow in the first few years. 

However, since 2018, issuers have launched more than 50 active ETFs in Europe, highlighting the significant push over the past few years.

Key takeaways

  • While traditionally known for passive investing, the ETF industry is witnessing a surge in active ETFs offering the potential for outperformance compared to benchmarks

  • Despite the seeming contradiction, active management strategies can be housed within the ETF structure, leveraging its benefits like daily transparency and intraday trading

  • Active management offers greater flexibility in fixed income, addressing potential inefficiencies in passive indexing

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