Fidelity International: The rise of active ETFs

August 25, 2025

^{This article was originally written in Dutch. This is an English translation.}

The rise of active ETFs is one of the most important trends in the investment industry. What started as a niche concept has grown into a fast-growing segment with more than $1 trillion in assets in active ETFs.

By Alastair Baillie Strong, Global Head of ETFs, Fidelity International

They are still in their infancy compared to the $12 trillion in assets in index-tracking ETFs, but they are growing much faster, with cumulative annual growth of 59% over five years compared to 23% for index-tracking ETFs (Figure 1).

The majority of assets in active ETFs are concentrated in funds domiciled in the US, accounting for more than $800 billion in assets under management and 8% of the total US ETF market. In contrast, active ETFs account for only 3% of the European market. Does this mean that the rapid adoption of active ETFs is solely an American phenomenon? We don't think so.

In the US, structural tax advantages have played an important role in stimulating demand. Because ETFs (index or active) can minimise capital gains distributions by conducting the creation and redemption process in kind, they may prove more attractive to some investors than mutual funds from a tax perspective. This tax advantage is largely unique to the US and is not available in Europe, where different tax rules and regulations apply. In addition, the US has led the way in the introduction and development of (active) ETFs over the past three decades.

While the US market dominates in terms of size, growth is accelerating in other regions. In Europe, for example, the active ETF market has grown strongly from $38 billion to $64 billion in 2024.

In the post-Covid era, the spread of returns in the investment markets has increased significantly, offering new opportunities for research-based strategies.

What are active ETFs?

Historically, the term “ETF” was synonymous with passive index tracking. Today, an ETF is better understood as a wrapper: a vehicle that can accommodate both passively and actively managed strategies.

Essentially, active ETFs are just ETFs – a fund structure that offers diversification opportunities and is traded on the stock exchange, but is managed by an active manager. This allows them to combine the advantages of the ETF wrapper with the advantages of an active management process.

Unlike traditional ETFs, which track an index, active ETFs do not seek to track a benchmark as closely as possible. Instead, they use an active approach to pursue various objectives that go beyond simply tracking an index. With this broad definition, it is clear that active ETFs are not a “one-size-fits-all” solution. They can be designed using different approaches and are suitable for a wide range of investment outcomes.

The reasons behind the adoption of active ETFs

Active investing remains at the heart of investor portfolios. Between October and November 2024, we collaborated with Coalition Greenwich to conduct a survey on current investment themes among institutional investors and intermediary distributors in Europe and Asia.

The results showed that active open-end funds remain the most widely used investment instruments, with 74% of respondents using active building blocks in their portfolios. Among these investors, nearly a quarter (24%) use active ETFs.

Furthermore, investors expect the use of active ETFs to grow faster than any other type of investment instrument over the next 18 months, with 37% of investors expecting an increase in their active ETF allocations. There are several reasons for this: reducing costs, generating alpha, sustainability goals or improving liquidity (Figure 2).

Investors expect the use of active ETFs to grow faster than any other type of investment vehicle over the next 18 months.

In the post-Covid era, the spread of returns in the investment markets has increased significantly, offering new opportunities for research-based strategies. In a world characterised by increased volatility and the search for returns and cost reduction, active ETFs can offer value to clients and play a specific role in investors' portfolios.

• Future-oriented investing: Indices weighted by market capitalisation inherently reflect past performance and often focus on yesterday's winners rather than tomorrow's opportunities. Active ETFs allow investors to take a more future-oriented approach by selecting securities based on expected performance.
• Investing with control: active ETFs can integrate risk management frameworks to navigate market volatility more effectively. Whether through systematic risk controls, discretionary portfolio rebalancing or dynamic allocation, active ETFs can help investors manage their exposure and respond proactively to changing market conditions.
• Efficient investing: Active ETFs offer the liquidity and cost advantages of an ETF wrapper while providing professionally managed strategies at attractive fees. In Europe, Ireland-based ETFs offer a tax advantage, particularly for investors seeking exposure to US equities, as they benefit from lower withholding tax on US dividends compared to some other fund structures.

Different active ETF providers use different research methods, portfolio construction techniques and risk management frameworks, all of which can have a significant impact on performance. The skills of the portfolio managers, the robustness of their investment models and the effectiveness of their strategy will naturally vary from company to company. By maintaining a presence in strategic locations in key capital markets and leveraging local knowledge and access to companies to conduct thorough due diligence on companies and their customers, suppliers and competitors, insights can be gained into the opportunities and risks for individual companies and the sectors in which they operate. These insights can be used to develop strategies that outperform the benchmark and help investors achieve their desired results.