Active, not passive: why active ETFs are having a moment

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Active ETFs are one of the fastest-growing areas of investing - but what are they, and why are more investors choosing them? This guide explains how active ETFs differ from passive ETFs, why they have gained momentum and the potential benefits and risks of combining active fund management with the flexibility, transparency and convenience of the ETF wrapper.

Investors expect active ETFs

to account for the majority of ETF launches by 2026, according to the influential Carne Group ‘Change 2025’ report. At the same time, inflows into active ETFs are surging. What gives them their appeal? They can bring the flexibility of active management, combined with the liquidity, diversification and cost benefits of the ETF wrapper.

It’s not just an institutional trend, either. Our own research shows ETFs are now the second most widely held collective investment product among self-directed investors, after funds — driven by the rise of low-cost platforms, the popularity of passive investing, and growing attention from the media and social media. Ownership has tripled in five years, from 5% in 2020 to 16% in 2025, climbing steadily every year (including a 4% jump in the last 12 months alone). The growth is sharpest among 35-44s, where ownership has leapt from 9% to 26%. A quarter of 18-34s now hold ETFs too. The over-55s are slower off the mark, at 6%. [1]

If that opening sentence contained two acronyms and a word you’d normally skip past, stick with us. The idea underneath is simpler than the jargon suggests, and it’s worth understanding because this corner of the market is growing fast.

Most ETFs are passive: they track an index like the FTSE 100 or S&P 500 and aim to match it. An active ETF keeps the same packaging - it still trades on an exchange like a share - but a fund manager decides what to hold and when, rather than following the index. Active management in an ETF wrapper.

Here’s why people are warming to the combination.

The active bit: flexibility when markets get messy

The whole point of active management is that someone is paying attention. A passive fund can only react to events when its index reshuffles, which might be quarterly. An active manager can adjust positions as things change — leaning into what they think will do well and trimming what they don’t.

Supporters argue this matters most when markets are uncertain, which lately has been most of the time. A few examples of where that flexibility shows up:

The pitch, in short: the potential for stronger long-term returns, the ability to aim at a specific goal (like income), and more hands-on risk management.

Active management is a promise, not a guarantee. The gap between the best and worst active managers can be vast, they may fail to beat the index they’re competing with, and active funds usually cost more than passive ones. You’re paying for skill which does not always materialise. Choosing well matters, and past performance does not always determine what happens next.

The ETF bit: the convenient wrapper

“Wrapper” is just jargon for the structure a fund is packaged in. The reason the ETF wrapper has become so popular is that it’s genuinely useful, and active ETFs inherit all of it:

Put the two halves together and you can see the appeal: the judgement of an active manager, delivered with the transparency, tradeability and value-for-money people have come to expect from ETFs.

The takeaway

Active ETFs aren’t magic, and they’re not free. They’re an attempt to get the best of both worlds - a fund manager who can actually make decisions, inside a wrapper that’s cheaper, transparent and easy to trade.

Whether that’s right for you comes down to the usual questions: what you’re investing for, how long you’ve got, what you’re paying, and whether you believe a given manager can earn their keep. As ever, do your homework, mind the costs, and remember that the value of investments can fall as well as rise - you may get back less than you put in.

This article is for information and doesn’t constitute personal financial advice. If you’re not sure what’s right for you, consider speaking to a regulated financial adviser. Capital at risk.

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[1] Boring Money: ETFs and Investment Trusts - The Retail Landscape