14 Aug 2025
Author | Aberdeen Investments
A look into the world of exchange-traded funds and why an actively managed approach is gaining traction with investors.
Historically, most exchange-traded funds (ETFs) have been passive, designed to track or mimic a specific index – until now.
While passive management has dominated the market since the Global Financial Crisis, there is a growing demand for actively managed ETFs, which have been dubbed “the next frontier in investor innovation." [1]
Because of their transparency, flexibility, and accessibility, investors now have more choices than ever.
The growth of active ETFs is driven by investors’ increasing appetite for this investment format and demand for a bigger variety of products. To meet this demand, fund managers are broadening their range of investment strategies offered as ETFs. Active ETFs’ asset under management (AUM) reached $1.17 trillion globally at the end of 2024, with $363 billion net inflows over that year [2]. Projections indicate that this will reach $4 trillion by 2030 [3]. This trend is also particularly relevant as investors seek actively managed options to help navigate today’s turbulent markets.
Active ETFs are not designed to replicate an index and typically aim to outperform a benchmark or sector. Helmed by professional fund managers, these ETFs use a proprietary mix of quantitative and qualitative investment strategies to inform buy and sell decisions. An active ETF usually aims to deliver alpha, a risk-adjusted return that beats a benchmark [4].
Active ETFs are increasingly popular among the next generation of retail and institutional investors, financial advisors, and other intermediaries.
Their rise stems from a mixture of legislation, product development, and market events and trends that brought their unique advantages into focus. Here’s why:
Active ETFs are managed by professional portfolio managers who leverage their expertise, research and insights to select securities they believe will outperform the market. This approach can potentially generate higher returns compared to passive ETFs, which track an index. It also gives investors access to institutional asset managers.
Active managers can adjust their portfolios in response to changing market conditions, economic trends, and emerging opportunities. This flexibility allows them to capitalise on market inefficiencies and mitigate risks more effectively than passive strategies.
Active ETFs offer more tailored diversification and risk management strategies. Managers can select a mix of assets aligned with specific investment goals, risk tolerances, and market outlooks, providing a customised investment experience.
Active ETFs can be a valuable addition to a broader portfolio that includes index-based holdings, as they aim to deliver incremental returns or other client-specific outcomes. Their flexibility through low denomination trading and liquidity has the potential to enhance overall portfolio models, helping to improve client outcomes.
Active ETFs often focus on innovative and thematic investment strategies that align with long-term trends, ideas, beliefs, and objectives. These strategies may focus on themes such as disruption, megatrends, sustainable investing, and unique insights and outcomes. By doing so, they can offer exposure to high-growth sectors and emerging trends that traditional index-based ETFs might overlook.
As with passive ETFs, investors can use beta and standard deviation to assess whether an active product meets its objective [5][6]. Additionally, there are two key risk metrics specifically applicable to active ETFs:
Alpha
A measure of how an ETF performs relative to a particular index or benchmark over a specified period, adjusted for volatility. It allows investors to determine whether a fund is outperforming or underperforming a passive benchmark. This metric is expressed as a percentage. For instance, an ETF with 3% alpha has exceeded its benchmark by 3%, accounting for the volatility of the fund’s portfolio.
Sharpe ratio
The Sharpe ratio measures an ETF’s excess returns relative to its volatility. It indicates how much excess return is generated per unit of risk taken. The Sharpe ratio is expressed numerically, and anything above one is considered good. A higher number implies that an investor is compensated for taking on extra risk with relatively outsized returns. This metric helps determine whether an active ETF is taking substantial risk to achieve outperformance. Ideally, an ETF will deliver above-average returns while minimising volatility.
Both styles of ETFs have their merits. Passive ETFs are ideal for investors seeking index-like returns with very low fees. Conversely, investors may gravitate towards active ETFs in order to seek to outperform the market, driven by the belief that professional managers can achieve superior returns.
Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.
Risk warning
The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.