Are Active ETFs Worth Adding to Your Portfolio?

When considering ways to incorporate an actively-managed investment option into your portfolio, many people automatically turn to traditional mutual funds or investment trusts.

However, a surprisingly small number of investors explore actively-managed exchange-traded funds, or ETFs, which are frequently – and often mistakenly – associated solely with passive investment vehicles.

Hector McNeil, co-founder and co-CEO of ETF white-labeller HANetf, emphasized to MoneyWeek the convenience of consolidating everything in one platform. He noted, “You can maintain your entire portfolio in a single location. Whether you hold gold ETFs, equity ETFs, or bond ETFs within a self-directed portfolio in your ISA or Sipp, the process is incredibly straightforward and economical.”

This growing appeal is evident in the surging popularity of active ETFs. Data from ETFBook, provided by HANetf, reveals that assets under management for European active ETFs skyrocketed by 87% in 2025, surpassing the previous year’s 68% increase and reaching an all-time high of $96.3 billion.

How do active ETFs function?

At its core, an active ETF encapsulates an active investment strategy within the familiar ETF structure. In an active approach, a skilled portfolio manager makes deliberate decisions on which assets to purchase or sell within the fund. This contrasts sharply with passive strategies, which simply replicate the performance of a benchmark index, such as the FTSE 100 or the S&P 500.

As explained by Debru, the degree of ‘activeness’ in ETFs exists along a continuum. “ETFs that are not fully active adhere closely to an index by design, but they aren’t limited to traditional market-cap weighted benchmarks,” Debru shared with MoneyWeek. “Today, thousands of indices are available, spanning from simple market-cap weighted ones to sophisticated systematic quantitative models. Even highly intricate strategies can be formalized as an index.”

ETFs like the WisdomTree Europe Equity Income UCITS ETF or the WisdomTree Japan Equity UCITS ETF exemplify this category. These funds follow proprietary indices that employ rule-based methodologies for investing in specific regions.

“The sole strategies that defy indexation are those involving pure active stock selection, where a portfolio manager daily chooses which stocks to include,” Debru further clarified.

Consequently, numerous index-tracking ETFs – classified as passive – deliver far more nuanced and targeted investment outcomes than standard broad-market indexing.

Conversely, certain ETFs dubbed ‘shy active’ are technically actively managed yet closely mirror an index. Take the JPMorgan UK Equity Core Active UCITS ETF, for instance: a team of portfolio managers exercises discretion to overweight or underweight specific stocks, while generally aligning with the FTSE All-Share Index.

Is an active ETF suitable for your investment needs?

Determining if an active ETF fits your situation hinges on your individual financial profile and the existing makeup of your portfolio. That said, if you’re eyeing a particular active strategy to bolster your holdings, an active ETF often presents the most efficient and uncomplicated avenue to implement it.

The longstanding debate between active and passive investing persists, with substantial evidence indicating that active strategies frequently lag behind their passive counterparts over time.

Nevertheless, as McNeil points out, active management shines in specific niches. “In less conventional asset classes such as catastrophe bonds, emerging markets, or small-cap stocks, I strongly favor an active manager over a passive index,” he stated.

Since active ETFs generally incur higher expense ratios than their passive peers, it’s crucial to verify that the fund’s results justify the premium. Investors should scrutinize the ETF’s three-year performance history to confirm it outperforms its stated benchmark or a relevant passive index tied to the sector or theme in question, prior to embracing those elevated costs.

Promising active ETFs to evaluate for your portfolio

To illustrate the diverse active strategies available through ETFs, consider these three noteworthy options that merit attention for potential inclusion in your investment lineup:

• Fidelity US Equity Research Enhanced UCITS ETF, which focuses primarily on U.S.-based equities. Over the three years ending February 17, it delivered annualized returns of 16.5%, outpacing its benchmark (US Large-Cap Blend Equity) at 13.0%.
• Invesco Global Active ESG Equity UCITS ETF, selecting ESG-vetted stocks using criteria like value, quality, and momentum. It achieved a remarkable 77.9% return over the three years to January 31, surpassing the MSCI World Index benchmark’s 69.9%.
• Guinness Sustainable Energy UCITS ETF, targeting companies poised to capitalize on energy transition opportunities over the coming two decades. This fund posted a 29.2% gain in the 12 months through February 17.

These examples highlight how active ETFs can offer targeted exposure to compelling themes, potentially enhancing portfolio diversification while leveraging professional management expertise. As the active ETF market continues to expand rapidly, they provide an accessible bridge between the flexibility of ETFs and the potential alpha generation of skilled stock pickers. Before investing, always review the latest fund documents, fees, and performance data to align with your risk tolerance and objectives.