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12 October 2026
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I hold an active fund in my portfolio, but the company it’s from has just let me know it’s launching an ‘active ETF’ that will invest in the same area. I thought ETFs tracked an index, so what does that mean, and is my money better off there?
Jack D
Paul Angell, AJ Bell Head of Investment Research, says:
Fund managers will regularly launch new products that they think will be exciting to investors and therefore bring in more money to their company. Our job as investors is to determine if the new product, in this case an active ETF, is something that has a real benefit to us that we aren’t getting elsewhere.
Before you try to decide where your money is better off, it’s important to understand what an active ETF is. An ETF (exchange-traded fund) is different from a traditional fund because of how it’s packaged. It is traded on an exchange, like a stock would be, and you therefore can get immediate access to the market. A traditional fund, on the other hand, you buy and sell off-exchange, meaning market exposure is delayed until the next (daily) pricing point.
Most ETFs do track an index, as you say. But there’s a growing group of products, called active ETFs, where managers diverge from the index and make their own selections, at least to some degree.
Why the new products?
There are a growing number of investment managers looking to the active ETF space: J.P. Morgan Asset Management has a range of active ETFs, as does Goldman Sachs and Schroders.
Part of the reason these products have been launched is to appeal to a younger generation of investors, who have shown a lot of interest in ETFs. They are also often priced cheaper than a traditional active fund, enabled by the lower administrative costs faced by ETFs and necessitated by existing within a more competitively priced part of the market. An investor therefore might face an ongoing charge between 0.25% and 0.45% for an active ETF, versus an ongoing charge of 0.45% to 0.9% for an active fund or investment trust.
In the US, ETFs also come along with additional tax benefits, but it’s important to understand that is not the case in the UK.
Are active ETFs the better move?
Active ETFs aren’t automatically the better investment, but they might suit you more than a traditional fund depending on what you value when you invest. One of the biggest advantages they hold is the ability to provide immediate market access at any point during market hours, just like buying a stock on an exchange. Traditional funds only process new investments once each day, which means the price could change from the time you initiate the trade to the time you are invested in the fund. For those who plan to keep their money in the same place for an extended period, this is likely to not make much of a difference in the long term. But for those that plan to make quite frequent trades, ETFs can be more efficient.
Cost, as explained above, is the other reason that investors might opt for an active ETF. More expensive products don’t guarantee you better returns, but they do guarantee that more of your investment will be eaten up by fees. That’s not to say that investments with higher fees are never worth it, just that it makes sense to shop around.
One element active ETFs can fall short on is offering an investment strategy that is truly differentiated by individual stock picking. While these products don’t follow an index, they often deliver something of a hybrid active and passive approach delivering small deviations from index returns either to the up or downside. How this is done, and to what degree, will differ by product.
Different ways of being active
The J.P. Morgan active ETFs, for example, follow a ‘research-enhanced’ approach. With analysts picking their favourite stocks, but portfolio managers looking to combine these in a way that resembles much of the characteristics of the broader market. This isn’t necessarily a bad thing given investment returns are largely reliant on asset allocation, i.e. weightings to a specific sector or region, rather than individual stock picking. Therefore by taking less ‘active risk’ investors are limiting the damage done if invested in underperforming parts of the market.
An active ETF therefore might fit the bill for your portfolio perfectly if you are on the hunt for an investment that could give you a little bit of an edge over the index. However, if you want an investment that acts completely differently to the index or broader market, you’re more likely to find that in a traditional active fund than an active ETF.
The best thing you can do is dig into the details of the fund you hold now as well as the active ETF they will be offering. You’ll want to pick the option that is not just the most exciting to you but is the best fit for the portfolio you’ve created.
Paul Angell: Head of Investment Research
Paul Angell is AJ Bell's Head of Investment Research. Paul began his investment career with a global investment bank in 2010, holding various roles across London and Hong Kong over the following years. In 2016...