Active ETFs: understanding the different roles they play

When ETFs were first introduced, they were largely seen as passive investing tools, tracking markets rather than trying to beat them. But the market has moved on. Both 2024 and 2025 were record years for active flows both in global and UCITS ETFs, and active flows represented 38% of global ETF flows in the first quarter of 2026.¹ For many investors who like the ETF structure, simple index tracking is out – and active is in.

Part of the appeal of active ETFs lies in the variety of roles they can play in a modern portfolio. Some stay close to the market while aiming to improve on it over time. Others take bigger positions in search of higher returns, or target a specific outcome such as generating income or helping manage downside risk.

Understanding these differences can help you access the strategies best suited to your investing goals and use active ETFs more confidently in your portfolio.

What makes an ETF active?

An active ETF is one where investment decisions are made by a portfolio manager or investment team, rather than simply tracking an index.

This active decision-making gives active ETFs more flexibility than passive ETFs. They can pick investments more selectively, adjust holdings as conditions change, and manage risk more deliberately.

Taking an active approach can create opportunities for outperformance, but outcomes depend on the quality of the decisions being made. That makes the strength of a manager’s research, resources and investment process especially important.

Different types of active ETFs

Active ETFs tend to fall into three main categories.

1. Index-enhanced strategies: core building blocks

Index-enhanced active ETFs are designed to sit at the heart of a portfolio, aiming to outperform broad market benchmarks without deviating too far from them. Rather than relying on a handful of big calls, they typically add value over time through many smaller active decisions, driven by fundamental research, quantitative models or a combination of both.

For investors, the upshot is a core allocation that feels familiar but has more room to adapt as conditions change. The excess return beyond a benchmark may be more modest than in other active strategies, but over time even relatively small gains can add up thanks to compounding.

2. Higher-alpha strategies: taking bigger positions

Higher-alpha active ETFs take a more assertive approach, moving further away from a benchmark in pursuit of higher potential outperformance or ‘alpha’.

These strategies tend to take larger, more active positions, whether in specific companies, industries or long-term trends. This creates more scope for outperformance than strategies which stay closer to the market, but is also more likely to produce performance swings that not all investors will be comfortable with.

Higher-alpha strategies allow you to express specific views or target areas of the market where you see greater potential.

3. Outcome-oriented strategies: achieving specific goals

Outcome-oriented active ETFs are designed with a particular outcome in mind, rather than benchmark outperformance alone. That outcome might be generating a more consistent income, smoothing returns over time, or acting as a buffer against market falls.

Take income investing as an example. A high dividend yield isn’t always a reliable guide to a company’s health and longevity, and higher bond yields may simply reflect higher credit risk. Active strategies can assess whether an income source is likely to be sustainable. They can also use option strategies to generate additional income, often in exchange for giving up some upside potential.

Other outcome-oriented strategies, including buffer ETFs, use tools such as hedging or options contracts to cushion losses and help smooth returns over time. This can help investors to stay invested when markets become turbulent, although strategies designed to limit losses may also limit gains when markets rise strongly.

Active ETFs in fixed income

Just as active equity ETFs can be used to improve on benchmark returns, take higher-conviction positions or target a specific outcome, active fixed income ETFs can offer a more precise way to access bond markets.

That matters because the fixed income universe is vast, with millions of individual securities, many of which are difficult to access or analyse. Bond investors also need to weigh up a range of factors, from interest rate sensitivity to issuer quality. Passive strategies can be limited by the indices they track, which may exclude large parts of the market and give the greatest weight to the issuers with the most debt.

Active fixed income ETFs give managers the flexibility to select stronger issuers, access underrepresented sectors and adjust interest rate, credit and sector exposure as market conditions change. It’s a more adaptable way to navigate this large and often less efficient part of the market.

Using different types of active ETFs together

An active ETF doesn’t have to be used on its own. Different types can be combined in a single portfolio.

An investor might use a core strategy for broad market exposure, a higher-alpha strategy in areas where they have stronger views, and include an outcome-oriented ETF to generate additional income or help manage risk.

Some multi-asset active ETFs take this idea a step further, combining active equity and bond ETFs in a single ready-made portfolio. Strategic allocation ETFs, for example, are complete portfolios of active ETFs, with different versions designed for different risk appetites.

However you choose to use them, active ETFs give you more flexibility to build a portfolio around your goals. The right mix will depend on what you want to achieve, how long you plan to invest and how much risk you are comfortable taking.

More choice and more access than ever

As ETFs have evolved, so has the range of roles they can play in your portfolio.

Markets today are more concentrated, risks are less evenly spread, and opportunities are more scattered. The ability to think forward, adapt and be selective matters even more than usual.

Active ETFs have expanded what’s possible within the ETF structure. Used well, they can give you more flexibility to build your portfolio, manage risk more deliberately and target the outcomes that matter most to you.