Insights
ETFsKnow your ETFs: Why active
A look into the world of exchange-traded funds, and why an actively managed approach is gaining traction with investors.
Author
Aberdeen Investments
Duration: 3 Mins
Date: May 14, 2026
Historically, most exchange-traded funds (ETFs) have been passive, designed to track or mimic a specific index, until now.
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.
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]
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.
A recent study revealed that within model portfolios that already included at least one active ETF, the average allocation to active ETFs grew from 12% in 2021 to 19.3% by the first quarter of 2024. This analysis specifically focused on portfolios containing active ETFs rather than providing an industry-wide assessment of active ETF adoption.[1]
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:
- Alpha3A measure of how an ETF performs relative to a particular index or benchmark over a specified period, adjusted for volatility. It allows investors to determine whether a fund is outperforming or underperforming a passive benchmark. This metric is expressed as a percentage. For instance, an ETF with 3% alpha has exceeded its benchmark by 3%, accounting for the volatility of the fund’s portfolio.
- Sharpe ratioThe Sharpe ratio measures an ETF’s excess returns relative to its volatility. It indicates how much excess return is generated per unit of risk taken. The Sharpe ratio is expressed numerically, and anything above one is considered good. A higher number implies that an investor is compensated for taking on extra risk with relatively outsized returns. This metric helps determine whether an active ETF is taking substantial risk to achieve outperformance. Ideally, an ETF will deliver above-average returns with low volatility.
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.
Next Steps
Featured Capabilities
We offer investment expertise across all key asset classes, regions and markets so that our clients can capture investment potential wherever it arises.
