If you’re looking to add an actively-managed fund to your portfolio, you might instinctively look at mutual funds or investment trusts.
Few investors consider actively-managed exchange-traded funds (ETFs), and ETFs are often – inaccurately – viewed as a byword for passive products.
But active ETFs can be a simple, convenient way to add an active management strategy to your portfolio.
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Compared with their passive counterparts, active ETFs carry the same pros and cons as most active funds: they have the potential to outperform their benchmark index through the skill of their manager. But this is not guaranteed, and they can underperform benchmarks. Whatever happens, they also tend to be more expensive than passive funds.
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Compared to a mutual fund or investment trust, active ETFs can offer greater convenience.
“You can keep all your portfolio in one place,” Hector McNeil, co-founder and co-CEO at ETF white-labeller HANetf, told MoneyWeek. “If you’ve got gold ETFs, equity ETFs or bond ETFs in a DIY portfolio in your ISA or your Sipp, it's very straightforward and cost-effective.”
Transparency and intra-day trading, meanwhile, are among the key advantages that ETFs offer over other types of fund.
“Compared to traditional mutual funds, ETFs are a more efficient and transparent wrapper as they trade on exchanges, provide intraday liquidity (instead of once a day at the end of the day) [and] are more transparent [because] it is possible to see the constituents daily instead of monthly or quarterly,” said Pierre Debru, head of research, Europe at ETF issuer WisdomTree.
These advantages are reflected in increased demand for active ETFs. According to ETFBook data from HANetf, European active ETFs’ assets under management (AUM) increased 87% in 2025, beating 2024’s 68% growth and hitting a record $96.3 billion.
Clearly, lots of investors see advantages in buying active ETFs. But what are they, and are they the right option for you?
How do active ETFs work?
An active ETF is simply an active strategy held within the ETF wrapper. An active strategy is one where a portfolio manager actively picks which assets to buy and sell into a fund, whereas a passive strategy mirrors an index like the FTSE 100 or the S&P 500.
As Debru explains, there is something of a spectrum of how ‘active’ an ETF can be.
“Non-active ETFs track an index (by definition), but they don’t have to track a market-cap weighted index,” Debru tells MoneyWeek. “Thousands of indices are now available, ranging from market-cap-weighted to the most advanced systematic quantitative strategies. Even very complex strategies can be explained in an index.”
Examples of ETFs that fall into this category are the WisdomTree Europe Equity Income UCITS ETF (LON:EEI) or the WisdomTree Japan Equity UCITS ETF (LON:DXJG), both of which track proprietary indices that follow rules-based approaches to investing in these geographies.
“The only strategies that cannot be described in an index are active stock-picking strategies, in which a portfolio manager decides daily which stocks to include in the portfolio,” Debru adds.
This means that a large amount of the index-based ETFs people invest in, which are technically categorised as passive, will actually reflect a much more refined investment strategy than conventional index investing.
On the other hand, there are what some people call ‘shy active’ ETFs that, while technically actively-managed, broadly track an index. JPMorgan UK Equity Core Active UCITS ETF (LON:JUKC), for example, is managed by a team of portfolio managers that have the discretion to under- or over-invest in certain stocks, but it broadly tracks the FTSE All-Share Index.
Is an active ETF right for you?
Whether or not an active ETF is right for you depends on your personal circumstances and the current composition of your portfolio. But if there is an active strategy that you are thinking of adding to your portfolio, then an active ETF could be the simplest way to achieve it.
The active versus passive debate is ongoing, and much data suggests that active strategies tend to underperform passive equivalents.
However, as McNeil explains, there are some sectors where taking an active approach makes more sense.
“Asset classes that are a little bit more esoteric, like catastrophe bonds or emerging markets or small caps… I would much prefer an active manager in [those spaces] than an index,” he said.
As active ETFs typically carry higher fees than passive ETFs, it is also important to establish that the strategy’s performance warrants this extra cost. It is worth looking back over their three-year track record to ensure that the ETF beats its own comparative benchmark, or another passive index that represents the sector or theme you’re considering investing in, before committing to the higher fees.
Active ETFs to consider for your portfolio
To give you an idea of the kinds of active strategies that ETFs can cover, here are three active ETFs that you could consider for your portfolio:
- Fidelity US Equity Research Enhanced UCITS ETF (LON:FUSS) which picks predominantly US-based stocks. It generated annualised returns of 16.5% in the three years to 17 February, compared to 13.0% for its benchmark (US Large-Cap Blend Equity).
- Invesco Global Active ESG Equity UCITS ETF (LON:IQSS) which picks ESG-screened stocks based on their value, quality and momentum factors. It returned 77.9% in the three years to 31 January, compared to 69.9% for its benchmark, the MSCI World Index.
- Guinness Sustainable Energy UCITS ETF (LON:CLMP), which invests in companies its managers think will benefit from the growth opportunities in the energy transition over the next 20 years. It gained 29.2% in the 12 months to 17 February.
