Is an active ETF a good purchase?

ETFs can be a practical way to incorporate active management into your portfolio, despite being mistakenly categorized as passive products

You may naturally consider investment trusts or mutual funds if you want to add an actively managed fund to your portfolio.

Exchange-traded funds (ETFs) with active management are rarely taken into consideration by investors, and they are frequently mistakenly thought of as a synonym for passive products.

However, adding an active management strategy to your portfolio can be done easily and conveniently with active ETFs.

Active ETFs have the same advantages and disadvantages as most active funds when compared to their passive counterparts: they may outperform their benchmark index as a result of their manager's skill. However, they may fall short of benchmarks, so this is not a given. Additionally, they are typically more costly than passive funds, regardless of the outcome.

Active exchange-traded funds (ETFs) can be more convenient than mutual funds or investment trusts.

Co-founder and co-CEO Hector McNeil of ETF white-labeller HANetf told BFIA, "You can keep all your portfolio in one place." "It's very simple and affordable if you have gold ETFs, equity ETFs, or bond ETFs in a DIY portfolio in your ISA or Sipp. A "

ETFs have several important advantages over other fund types, including intra-day trading and transparency.

Pierre Debru, head of research, Europe at ETF issuer WisdomTree, stated, "ETFs are a more efficient and transparent wrapper than traditional mutual funds because they trade on exchanges, provide intraday liquidity (instead of once a day at the end of the day), and let you see the constituents every day instead of monthly or quarterly."

The growing demand for active ETFs is a reflection of these benefits. Assets under management (AUM) for European active ETFs grew by 87% in 2025, surpassing the 68% growth in 2024 and reaching a record £96.3 billion, according to ETFBook data from HANetf.

Clearly, purchasing active ETFs is advantageous to many investors. However, what are they and do you think they're the best choice?

Do active ETFs operate?

An active strategy contained within an ETF wrapper is what is known as an active ETF. While a passive strategy replicates an index such as the FTSE 100 or the SandP 500, an active strategy involves a portfolio manager actively choosing which assets to buy and sell into a fund.

According to Debru, an ETF's level of activity can vary somewhat.

Debru tells the BFIA, "Non-active ETFs track an index (by definition), but they don't have to track a market-cap weighted index." There are thousands of indices available today, ranging from the most sophisticated systematic quantitative strategies to market-cap-weighted ones. An index can provide an explanation of even the most complicated strategies. A "

The WisdomTree Europe Equity Income UCITS ETF (LON:EEI) and the WisdomTree Japan Equity UCITS ETF (LON:DXJG) are two examples of ETFs that fit this description. They both track proprietary indices that use rules-based investing strategies in these regions.

"Only active stock-picking strategieswhere a portfolio manager makes daily decisions about which stocks to include in the portfoliocannot be characterized by an index," Debru continues.

This implies that a significant portion of index-based ETFs, which are classified as passive in theory, will actually represent a far more sophisticated investment approach than traditional index investing.

Conversely, there are what some refer to as shy active exchange-traded funds (ETFs) that broadly track an index but are technically actively-managed. For example, the JPMorgan UK Equity Core Active UCITS ETF (LON:JUKC) tracks the FTSE All-Share Index in general but is managed by a group of portfolio managers who have the authority to under- or overinvest in specific stocks.

Do you want to invest in an active ETF?

Depending on your unique situation and the current makeup of your portfolio, an active ETF may or may not be the best option. That being said, an active exchange-traded fund (ETF) might be the easiest way to incorporate an active strategy into your portfolio.

There is a continuous debate about active versus passive strategies, and a lot of evidence indicates that active strategies typically perform worse than their passive counterparts.

But as McNeil explains, there are some industries where it makes more sense to adopt an active strategy.

He stated, "I would much prefer an active manager in those spaces than an index for asset classes that are a little bit more esoteric, like catastrophe bonds or emerging markets or small caps."

It is also crucial to prove that the strategy's performance justifies the additional expense, since active ETFs usually have higher fees than passive ETFs. Before paying the higher fees, it is worthwhile to review the ETF's three-year track record to make sure it outperforms other passive indices that reflect the industry or theme you are thinking about investing in, or its own comparative benchmark.

Think about adding active ETFs to your portfolio.

The following three active ETFs are examples of the types of active strategies that ETFs can cover and that you may want to include in your portfolio.

The primarily US-based stocks are chosen by the Fidelity US Equity Research Enhanced UCITS ETF (LON:FUSS). During the three years ending February 17, it produced annualized returns of 16.5%, while its benchmark, US Large-Cap Blend Equity, produced returns of 13.0%. Using value, quality, and momentum criteria, the Invesco Global Active ESG Equity UCITS ETF (LON:IQSS) selects ESG-screened stocks. In the three years ending January 31, it returned 77.9%, while its benchmark, the MSCI World Index, returned 69.9%. The Guinness Sustainable Energy UCITS ETF (LON:CLMP) makes investments in businesses that its managers believe will profit from the expansion prospects presented by the energy transition over the course of the next two decades. During the 12 months ending February 17, it increased by 29.2%.