An ETF (exchange-traded fund) is like a basket of investments—such as shares in many companies—that you can buy and sell on a stock market like a single share. It gives you the benefit of spreading risk more than buying just one company.
ETFs have become one of the most popular ways to invest because they are simple, cost-effective, and flexible. But not all ETFs are the same. There are two main types: passive and active. Understanding the difference is key to knowing why active ETFs, in particular, are gaining attention.
This piece reports on original analysis by Thomas Hartmann-Boyce, CFA, ARK Invest. It has been independently written and edited by InvestEngine. For ARK’s original content and disclosures, visit europe.ark-funds.com.
Passive vs active ETFs
- Passive ETFs aim to track an index, like the FTSE 100 in the UK or the S&P 500 in the US. These indexes include large, established companies, and the ETF just holds those same firms in the same proportions. The aim is to “track” the market’s performance. They don’t rely on a manager to make choices—they just aim to mirror the return of that index.
- Active ETFs, on the other hand, are run by managers who make decisions about which companies to include. The goal is not just to match the market, but to do better than it. These managers study trends, financial data, and industry shifts, then select investments they believe will outperform.
Both types of ETFs trade like shares on the stock exchange, so they are easy to buy and sell during market hours.
Why active ETFs are becoming popular
ETFs began in the early 1990s with passive models, which were great for giving investors cheap, broad exposure to markets. Over time, though, investors wanted the chance to do more than just follow the market.
They wanted to back new ideas, spot emerging winners, and access expert research, all with the same flexibility and transparency ETFs already offered.
Active ETFs are the answer to this demand. They combine the professional decision-making of active funds with the cost-efficiency and ease of ETFs. Compared to old-style mutual funds, active ETFs often:
- Publish holdings more often, so you can see what’s inside
- Charge lower fees, keeping costs down
- Trade quickly and easily, just like shares
This mix makes them appealing to investors looking for something in between traditional active funds and purely passive trackers.
ARK’s view: active ETFs for disruptive innovation
ARK believes active ETFs are especially powerful when investing in disruptive innovation. Disruptive innovation refers to technologies or companies that can reshape industries and create entirely new markets. Examples include:
- Artificial intelligence (AI)
- Robotics and automation
- Energy storage and electric vehicles
- Blockchain and digital assets
- DNA sequencing and biotechnology
These areas don’t always fit neatly into traditional indexes like the FTSE 100, which tend to focus on bigger, more established companies. By the time these innovations are large enough to appear in an index, much of the early growth may already have happened.
An active ETF allows managers to focus directly on these emerging companies, picking the ones they believe have the best potential. In other words, active ETFs let investors potentially capture innovation earlier, rather than waiting for it to become mainstream.
A new way of investing
When ARK launched its first active ETFs in 2014, it was unusual. At that time, active ETFs were rare and most investors associated ETFs only with passive strategies. But ARK showed that active ETFs could combine the best of both worlds:
- The flexibility and liquidity of ETFs (easy trading, daily pricing)
- The insight and research of active management
- The transparency of modern funds (regular updates on holdings)
Since then, active ETFs have grown rapidly, particularly in the US. In Europe, the market is still developing, but the trend is clear. More and more providers are offering active ETFs, and investor interest is building.
The advantages of active ETFs
Here’s a simple breakdown of why some investors choose active ETFs, especially in innovation:
- Expert selection: Managers study markets and pick companies most likely to succeed.
- Transparency: Investors can see what is inside the fund and how it changes.
- Lower cost: Active ETFs usually cost less than traditional active funds.
- Liquidity: Because they trade on exchanges, investors can buy or sell during the day.
- Innovation focus: They can target companies creating the future, not just those dominating the present.
The risks to consider
It’s important to be balanced. Active ETFs are not risk-free.
- Volatility: Companies focused on innovation can be fast-growing, but also unpredictable. Share prices may rise quickly but also fall sharply.
- Uncertainty: Active managers make choices, and those choices might not always pay off. Not every fund beats the market.
- Europe vs US: In Europe, active ETFs are still developing. They are less common here than in the US, meaning adoption may be slower at first.
Why this matters for investors
For investors, active ETFs represent a way to back the future. They allow people to invest in companies leading breakthroughs in technology, science, and industry—without having to pick individual shares.
At the same time, they remain more affordable and transparent than older types of active funds. That means investors can see what they’re investing in, keep costs under control, and adjust quickly if their goals change.
For long-term investors who are comfortable with some ups and downs, active ETFs can be a compelling way to capture innovation and growth. But as with any investment, it’s essential to understand the risks, think about time horizons, and avoid relying on short-term performance.
Looking ahead
Active ETFs are still relatively new compared with traditional funds, but they are growing fast. The combination of flexibility, transparency, and professional insight makes them well suited to today’s fast-changing markets.
Innovation doesn’t move in straight lines—it often comes in bursts, with setbacks along the way. Active ETFs are designed to navigate that journey by backing the companies pushing boundaries, while still giving investors the benefits of ETF structure.
For investors interested in the technologies shaping the next decade, active ETFs could be one of the most effective tools to get involved.
Important information
Capital at risk. The value of your investments may go down as well as up, and you may get back less than you invest.
Tax treatment depends on your personal circumstances and may change in future. This article is for general information only and does not constitute financial advice.
This article covers complex scientific topics that may use advanced terminology. We’ve simplified where possible, but some sections may require a higher reading level.
Past performance is not indicative of future performance. ETF costs also apply. If in doubt you may wish to consult a professional adviser for guidance.