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Active ETFs Explained

See how an active ETF differs from a passive one, step by step.

What an active ETF is

An active ETF is an exchange-traded fund where a portfolio manager actively selects and weights holdings in an attempt to beat a benchmark index, rather than simply tracking one.

How it differs from a passive ETF

A passive ETF is built to replicate an index's holdings and weights as closely as possible, minimizing tracking error. An active ETF instead uses the benchmark as a reference point while the manager overweights or underweights specific holdings based on their own market view.

How holdings are disclosed

Some active ETFs abroad use a 'non-transparent' structure that doesn't disclose full holdings in real time, but most active ETFs are required to publish their holdings on a regular basis, just like passive ETFs, so investors can see what they own. Disclosure frequency and format can change with regulation, so check the fund manager's disclosures.

Higher fees than passive ETFs

Because active management requires research staff and ongoing analysis, active ETFs typically carry a higher expense ratio than comparable passive ETFs, which only need to replicate an index.

Outperformance isn't guaranteed

Active management doesn't guarantee outperformance; if the manager's calls don't pan out, an active ETF can underperform its benchmark, and sometimes a comparable passive ETF too. Past performance is no guarantee of future results, here as with any actively managed product.

Heavy dependence on the manager

An active ETF's results depend heavily on the skill and process of the manager or team running it. Beyond the index methodology you'd check for a passive ETF, it's worth researching the manager's investment philosophy, track record, and any recent changes in the management team.

Compare cost against actual excess return, not just the label

The whole premise of paying a higher fee for an active ETF is that the manager's skill will more than offset that extra cost through better returns. When evaluating one, look at its performance net of fees against its stated benchmark over a meaningful period, ideally a year or more, rather than judging it purely on short-term returns or the manager's reputation.

For general education only, not investment advice

This page provides general education about how active ETFs work and is not a recommendation for any specific fund or manager. Fee levels, disclosure rules, and the range of active ETF products available continue to evolve, so check current fund documents and regulatory disclosures before investing.

Frequently Asked Questions

Can active ETFs be traded in real time like other ETFs?

Yes. Active ETFs are listed on an exchange just like passive ETFs, so they can be bought and sold at live market prices throughout the trading day.

Do active ETFs always outperform passive ETFs?

No. If the manager's judgment doesn't play out as expected, an active ETF can underperform its benchmark and even a comparable passive ETF. Past performance never guarantees future results.