Exchange-traded funds, once closely associated with broad market equity exposures, now offer investors access to fixed income, more precise allocations, such as sectors, factors, fixed-maturity strategies, new structures, such as swap ETFs and markets, such as crypto. The latest stage in that development is the rise of actively managed ETFs. For Sophie Thurner of BlackRock, the starting point is the ETF structure itself rather than the investment strategy placed inside it.
“The purpose of the ETF wrapper is to give investors a more accessible way to reach the underlying strategy,” Sophie Thurner says. “It’s operationally easier to trade than a mutual fund, it has a secondary market, and investors can trade it on an exchange.” Transparency is another important part of the proposition. Investors can see the holdings of an ETF on the provider’s website each day, whether the product follows an index or uses an active strategy. ETFs tend to also have a more attractive price point than traditional mutual funds, Sophie Thurner says.
These features are becoming particularly relevant as more European savers take direct responsibility for investing for their retirement. Digital banks and investment platforms have made it possible to buy funds quickly through a mobile phone, helping to broaden the potential market for ETFs. Active ETF assets in EMEA more than tripled from USD 31 billion at the end of 2023 to around USD 97 billion at the end of 2025, with active ETFs accounting for roughly 8 per cent of ETF industry flows last year.
“We have demand from investors, and we have supply because more and more issuers are offering active ETFs,” she says. “Active strategies could previously be difficult to access, and the ETF is helping to democratise them. They allow investors access to the same portfolio manager, investment process and alpha opportunity.” The European active ETF market developed later than its US counterpart, but Sophie Thurner believes the same combination of investor demand, easier distribution and product innovation is now supporting rapid growth in Europe.
There are three principal uses for active management within an ETF, according to Sophie Thurner. The first, and currently the largest, is to seek a modest return above an index without departing too far from the benchmark’s risk profile – often named as Enhanced ETFs. Different providers use labels such as Active Enhanced, Research Enhanced or Alpha Enhanced, but the broad objective is similar: to generate limited outperformance while controlling tracking error.
“Many clients still want, or need, to be measured against the large benchmarks,” Sophie Thurner says. “They want to retain the benchmark’s risk characteristics but also have the potential to generate some alpha.” Around 80% of European active ETF flows have so far gone into these ‘index plus’ strategies.
The second use is to target a specific investment outcome. This category includes Buffer ETFs, which seek to protect investors from a defined amount of downside while offering part of the market’s upside over a set period. Other strategies use derivatives to generate additional income from a broad equity portfolio.
The third area is made up of markets that are difficult to capture through a conventional index. Sophie Thurner points to securitised debt, collateralised loan obligations and cash strategies as examples where active portfolio construction may offer a more practical route into the asset class. Fixed income also presents a natural case for active selection. A single issuer may have several bonds outstanding with similar risks but different characteristics. An active manager can decide which security offers the most attractive place in the portfolio instead of buying bonds solely according to their weight in an index.
Active ETF success is ultimately about delivering both alpha and liquidity: generating alpha is only part of the equation if trading costs, execution or rebalancing erode value before it reaches the investor.
An ETF’s liquidity ultimately depends on the securities it owns, despite the additional trading possibilities provided by the secondary market. Broad and liquid portfolios tend to work well, while highly concentrated strategies or portfolios of niche, illiquid assets may prove less suitable. “Very concentrated funds with illiquid underlying stocks aren’t ideal for the ETF wrapper,” Sophie Thurner says.
One of the most common questions from investors is not whether active ETFs have a role, but how they should be used alongside index products. For large portfolio building blocks, a conventional index ETF can remain an efficient solution and active ETFs can serve as an additional component within the portfolio. An investor might allocate one sleeve to an enhanced strategy in search of consistent alpha while keeping risk close to the benchmark.
Demand for income is also becoming an increasingly important consideration for investors, particularly for those who want to generate regular cash flow while remaining invested in equity markets. Active ETFs can address this need through diversified portfolios that combine dividend income with an options strategy. “The underlying shares provide dividends, while the manager can sell call options on part of the portfolio to generate additional income from option premiums,” Sophie Thurner says. “The objective is to deliver an attractive level of income while retaining meaningful participation in long-term equity-market growth.” The continued development of active ETFs is ultimately giving investors a broader toolkit for building portfolios. Strategies that were previously available mainly through mutual funds or more specialised investment vehicles can increasingly be delivered through the accessible, transparent and tradable ETF structure. “For us, active ETFs are an evolution of capabilities BlackRock has built over many years, bringing established active strategies into the ETF wrapper where that format makes sense for investors.We are still at an early stage of that development,” Sophie Thurner says. “As the market evolves, we expect the range of strategies available through active ETFs to expand, giving investors more choice in how they pursue return, income and specific portfolio outcomes.”
