Active ETFs have rapidly gained ground in portfolios, but their existence is still relatively new, and investors continue to raise questions about them. Nick King, Head of Exchange Traded Funds at Robeco, addresses one of the most common concerns: are active ETFs truly active?
“A common concern about active ETFs is whether their approach is genuinely active or if they are simply restructured versions of passive strategies. Thanks to the evolution in ETF design, the line between active and passive is becoming increasingly blurred. Semi-transparent ETFs, rules-based strategies, or highly customized indices can blur traditional definitions, actually offering more opportunities for investors,” says Nick King.
Do active ETFs inherently carry greater risk simply because they deviate from an index?
“While active ETFs diverge from index-based strategies, this divergence does not automatically translate into greater risk. In fact, they often offer greater diversification and better risk management compared to certain passive strategies, especially when benchmark indices are heavily concentrated in just a few mega-cap stocks,” the expert points out.
King offers an example: indices like the S&P 500 can expose investors disproportionately to the Magnificent Seven. Active ETFs employ comprehensive risk management frameworks and sophisticated analytical tools to mitigate these concentration risks.
Can active ETFs really outperform after fees?
“Active ETFs offer greater transparency regarding costs compared to traditional investment funds, which makes it easier for investors to clearly understand what they are paying for: namely, the intellectual property and strategic insights of the underlying investment approach—not the ETF wrapper itself. In other words, investors are primarily paying for the quality and effectiveness of the investment strategy built into the ETF. As a result, active ETFs provide investors with cost-effective access to sophisticated active management insights,” says the Head of Exchange Traded Funds at Robeco.
Are active ETFs less liquid than passive ones?
The expert notes that “ETFs benefit from two levels of liquidity. First, liquidity comes from the ETF’s underlying investments: stocks, bonds, or other assets it holds. Second, the ETFs themselves are tradable securities on secondary markets. Even when an ETF shows a low daily trading volume, authorized market participants (such as institutional trading desks) continually facilitate liquidity by creating and redeeming ETF shares according to investor demand, allowing them to trade instantly at quoted prices.”
As a result, the liquidity of an ETF is primarily determined by the liquidity of its underlying assets. This mechanism ensures that active ETFs maintain the same liquidity as their underlying investments, regardless of their trading volume on exchanges.
