While passive management has dominated the market since the Global Financial Crisis, there is a growing demand for actively managed ETFs, which have been dubbed “the next frontier in investor innovation.”¹

Because of their transparency, flexibility, and tax efficiency, investors now have more choices than ever.

The growth of active ETFs is driven by traditional fund managers realizing that ETFs serve as a great wrapper and investment vehicle for a broad range of strategies, with projections that active ETFs will reach $4 trillion in AUM by 2030.² This trend is also particularly relevant as investors seek actively managed options to help navigate today’s turbulent markets.

Active ETFs defined

Active ETFs are designed to outperform a benchmark index or sector. Helmed by professional fund managers, these ETFs use a proprietary mix of quantitative and qualitative investment strategies to inform buy and sell decisions.

An active ETF aims to deliver alpha, providing a risk-adjusted return that beats a benchmark.³

The rise of active

Active ETFs are increasingly popular among the next generation of retail and institutional investors, financial advisors, and other intermediaries. According to Morningstar, the number of active ETFs has increased fivefold since the beginning of 2019, and AUM in such funds has grown by a factor of seven over the past five years .⁴

Their rise stems from a mixture of legislation, product development, and market events and trends that brought their unique advantages into focus. Here’s why:

Potential for outperformance

Active ETFs are managed by professional portfolio managers who leverage their expertise to select securities they believe will outperform the market. This approach can potentially generate higher returns compared to passive ETFs, which track an index.

Adaptability to market conditions

Active managers can adjust their portfolios in response to changing market conditions, economic trends, and emerging opportunities. This flexibility allows them to capitalize on market inefficiencies and mitigate risks more effectively than passive strategies.

Diversification and risk management

Active ETFs offer more tailored diversification and risk management strategies. Managers can select a mix of assets aligned with specific investment goals, risk tolerances, and market outlooks, providing a customized investment experience.

Flexibility and tax efficiency

Active ETFs differ from mutual funds in that they are much more tax efficient. Mutual funds, typically distribute capital gains less frequently, which allows for more effective and frequent tax-loss harvesting.

Active ETFs can be a valuable addition to a broader portfolio that includes index-based holdings. They aim to deliver incremental returns or other client-specific outcomes. Their flexibility and tax efficiency have the potential to enhance overall portfolio models, helping to improve client outcomes.

Innovation and thematic investing

Active ETFs often focus on innovative and thematic investment strategies that align with long-term trends, ideas, beliefs, and objectives. These strategies may focus on themes such as disruption, megatrends, sustainable investing, and unique insights and outcomes. By doing so, they can offer exposure to high-growth sectors and emerging trends that traditional index-based ETFs might overlook.

Active measures of risk

As with passive ETFs, investors can use beta and standard deviation to assess whether an active product meets its objective.^5,6 Additionally, there are two key risk metrics specifically applicable to active ETFs:

Why choose either active or passive

Both styles of ETFs have their merits. Passive ETFs are ideal for investors seeking index-like returns with very low fees. Conversely, investors may gravitate towards active ETFs to outperform the market, driven by the belief that professional managers can achieve superior returns.

¹ "The Year of the Active ETF." Institutional Investor, March 2025. https://www.institutionalinvestor.com/article/2eesgfd1awgu19g2ypekg/innovation/the-year-of-the-active-etf.
² "Decoding active ETFs." BlackRock, December 2023. https://www.blackrock.com/ca/institutional/en/literature/market-commentary/decoding-active-etfs-ca-en.pdf.
³ Alpha is a measure of performance, on a risk-adjusted basis, calculated by a comparison of the volatility of the portfolio vs its benchmark, on a risk-adjusted basis. A positive alpha of 1.0 means the fund outperformed its benchmark index by 1%, while a negative alpha indicates underperformance.
⁴ Morningstar's Guide to US Active ETFs." Morningstar, June 2024. https://www.morningstar.com/business/insights/research/guide-to-us-active-etfs.
⁵ Beta measures the sensitivity of a fund in regards to the movement of its benchmark. A beta over 1.0 means that the investment has been more volatile than the benchmark, while a beta of less than 1.0 represents less volatility.
⁶ A standard deviation is a statistical measurement that sheds light on historical volatility. For example, a volatile stock will have a high standard deviation while the deviation of a stable blue-chip stock will be lower. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns.

Important information

Investing in ETFs involves risk, including possible loss of principal. There is no assurance that the investment objective of any fund will be achieved. ETF shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. As a result, an investor may pay more than net asset value when buying and receive less than net asset value when selling. In addition, brokerage commissions will reduce returns. Fund shares are not individually redeemable directly with the Fund but blocks of shares may be acquired from the Fund and tendered for redemption to the Fund by certain institutional investors in Creation Units.

The value of a security may decline for reasons directly related to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods or services. The stock or other security of a company may not perform as well as expected, and may decrease in value, because of factors related to the company, to the industry in which the company is engaged, or to the market as a whole. The Fund is subject to the risk that the Adviser or Subadviser may make poor security selections. Funds that invest a greater proportion of their assets in the securities of a smaller number of issuers will be subject to greater volatility with respect to their investments than funds that invest in a larger number of securities. Securities of smaller companies are usually less stable in price and less liquid than those of larger, more established companies. Therefore, they generally involve greater risk.

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