Active ETFs are on the rise, with assets held in these funds rising nearly 70% last year in Europe.
While often thought of as passive instruments, actively-managed exchange-traded funds (ETFs) are surging in popularity.
Research from HANetf shows that assets under management (AUM) by European active ETFs increased 68% to $55.43 billion last year. Net inflows into European active ETFs totalled $19.46 billion during 2024, and according to HANetf’s latest Exchange-Traded Europe Q4 2024 report, 94% of European wealth managers are planning to make greater use of active ETFs over the next year.
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“A few years ago, if someone said they used ETFs in their portfolio, it would have been fair to assume they were using passive, index-tracking strategies,” says Tom Bailey, head of research at HANetf.
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“This is rapidly changing,” he continues. “Investors are increasingly recognising that ETFs are simply a fund structure – a wrapper that can hold both passive and actively-managed strategies.”
What is an active ETF?
As Bailey points out, an ETF is simply a wrapper. It can designate almost any type of fund strategy: the defining characteristics of ETFs are that they trade in real-time on a stock exchange, and that they use a creation and redemption mechanism to create (and remove) new shares as demand for the ETF changes.
Without going into the technicalities of how the creation and redemption mechanism works, that means that the price change of an ETF always corresponds to the price change of the assets it holds. That distinguishes ETFs from investment trusts (also known as closed-ended funds) which have a fixed number of shares, and can therefore trade at a premium or discount to the value of their assets (net asset value, or NAV).
ETFs, though, always trade in line with their NAV.
Within these parameters an ETF can do almost anything. They gained popularity as tracker funds, passively reflecting the price changes of an index, such as the S&P 500.
As such they are often misconstrued as passive instruments, but there is no reason why an ETF can’t pursue an active strategy. In this instance, the ETF will replicate an actively-managed portfolio constructed by a professional portfolio manager.
That, at its heart, is an active ETF: an actively-managed strategy wrapped in the ETF structure.
Four active ETFs to consider buying
As a demonstration of the range of active ETFs available to investors, here are four that demonstrate a breadth of risk-on and risk-off approaches
Guinness Sustainable Energy UCITS ETF (LON:CLMA)
Sustainable energy is a favourite sector for long-term investors, particularly those with an active mindset.
This ETF invests in sustainable energy producers and companies involved in sustainable energy storage, as well as the electrification of energy demand. It excludes fossil fuel producers.
Actively managed by Guinness Global Investors, this fund, like investing in copper, is effectively a long position on the energy transition.
Invesco Global Active Defensive ESG Equity UCITS ETF (LON:LVLG)
This active ETF can add a defensive element to the portfolio of any investor worried about stock market volatility. Its portfolio is distributed among companies that are screened for low volatility, whilst also aiming to outperform the MSCI World Index. Companies are also screened for their ESG credentials.
All that said, there are some strong growth stocks in the fund’s holdings, including Microsoft and Nvidia.
Fidelity Pacific ex-Japan Equity Research Enhanced UCITS ETF (LON:FPXS)
With fees of just 0.2%, this is one of the cheapest active ETFs on the market. As the name suggests, it tracks a portfolio of equities from the Pacific region, excluding Japan.
Fidelity also issues a US equities active ETF with the same fee, for anyone seeking actively-managed US exposure. That is the Fidelity US Equity Research Enhanced UCITS ETF (LON:FUSS).
Jupiter Global Government Bond Active UCITS ETF (LON:GOVE)
This is an intriguing strategy that was launched as an active ETF in February. The strategy, managed by Vikram Aggarwal, aims to identify mispriced sovereign bonds from across the globe by comparing Jupiter’s assessment of national economies to the market’s expectation.
Active ETFs can also be a means towards investing in bonds, not just equities.
