Active ETFs are gaining ground. Is your portfolio prepared?

More investors are turning to this fund structure for active strategies, drawn by its transparency, liquidity, and potential tax efficiency.

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If someone says most of their portfolio sits in exchange-traded funds (ETFs), you might assume they take a passive approach: buying broad market exposure through funds that track benchmarks such as the S&P 500, FTSE 100, or MSCI World instead of selecting individual stocks in hopes of beating them. Until recently, that would have been the obvious conclusion.

That assumption would have been reasonable. For the past three decades, ETFs have been treated - incorrectly - as synonymous with passive investing. The world's largest ETF follows the S&P 500, and broad funds that track indexes still attract the most money. Even so, the connection is beginning to weaken.

The wrapper advantage

An ETF tells you how a fund is packaged, not how it invests. It may track an index, but it does not have to; the same structure can support an active strategy. Increasingly, fund managers are using it that way.

The United States is out in front: active ETFs now hold nearly 10% of all US assets under management (AUM). The UK remains at an early stage, though the market is beginning to shift. Well-known managers including Jupiter Asset Management and Guinness Global Investors have recently begun packaging their active strategies as ETFs. Across Europe, actively managed ETF AUM rose 68% last year.

Why now? Fund houses want wider distribution. Offering the same strategies through several wrappers - OEICs, investment trusts, and now ETFs - gives investors more ways to buy them. ETFs are becoming especially familiar to younger investors, so the calculation is straightforward: offer the product in the format they already use.

Tax, liquidity and transparency

More investors are choosing ETF wrappers for active strategies, largely because of their potential tax advantages, easier trading, and clearer disclosure.

A mutual fund order usually doesn't lock in the price you see when you submit it. Instead, the platform fills the order using the fund's end-of-day unit price. ETFs work differently: investors can buy them on a stock exchange during trading hours, with the price set at the time of purchase.

ETFs trade throughout the day on stock exchanges, so a purchase made through your platform goes through at the current market price. You can see the price and complete the trade immediately; mutual funds, by comparison, may feel slow and cumbersome in an on-demand world.

Transparency is another reason investors favor ETFs. Mutual funds have not traditionally revealed their holdings every day, whereas ETFs have, allowing investors to see exactly what they own. Regulators are now relaxing that rule, but even if the UK and Europe adopt the latest US approach, many asset managers will probably continue publishing complete daily holdings.

Many ETFs offer a tax benefit as well. It is not the same advantage these funds receive in the US, but it still matters: most ETFs listed in London are domiciled in Ireland, so they generally pay 15% withholding tax on dividends from US shares rather than the standard 30%. Many mutual funds cannot claim the same treatment. That difference can add up over time, particularly for ETFs heavily invested in US equities.

Active will be the new normal

In a few years, saying that someone invests in ETFs may tell you very little about how they invest. It will mainly show that they want market access through a fund structure that offers transparency, liquidity, and tax efficiency. The ETF, we believe, will become the standard choice for most investors, whether their approach is active or passive.

At HANetf, we're building one of Europe's broadest ranges of genuinely active ETFs. That means no closet trackers and no "shy active" funds. Instead, our lineup features clear, conviction-led strategies - from healthcare and clean energy themes to global and regional fixed income and core equity - each delivered through an ETF wrapper.

You can discover HANetfs full range of active ETFs at hanetf.com.