What is an Active ETF? September 26, 2025

An Active ETF is an exchange-traded fund with a portfolio that is actively managed by investment professionals. Unlike passive ETFs that simply mirror a stock index, investment in active ETFs involve ongoing buy and sell decisions aimed at achieving a specific goal — whether that is outperformance, generating income, or capturing exposure to a particular theme.

How Active ETFs differ from Passive ETFs

• Objective: Passive ETFs aim to replicate an index (e.g., S&P 500). Active ETFs aim to outperform a benchmark or achieve a specific outcome (e.g. high income or targeted growth).
• Management: Passive ETFs follow rules automatically while active ETFs rely on human judgement, quant models, or a combination of both.
• Costs: Active ETFs usually charge higher management fees because of the research, trading, and portfolio management involved.
• Transparency & Holdings: Passive ETFs typically disclose holdings frequently and are predictable. Some active ETFs may disclose less often to protect proprietary strategies, although many still provide daily updates.

2. Why Demand for Active ETFs Is Growing

• Access to differentiated strategies
  Active ETFs open the door for retail investors to tap into strategies once reserved for mutual funds or large institutions. These can include thematic bets on artificial intelligence, enhanced income strategies, or opportunities in niche and tightly regulated markets.
• ETF wrapper benefits
  With active ETFs, investors enjoy the best of both worlds: the expertise of an active manager combined with the advantages of the ETF structure. This includes intraday liquidity (they trade like a stock), potential tax efficiencies, and lower minimum investment amounts compared with some mutual funds.
• Innovation and regulation
  Recent regulatory developments and improvements in ETF infrastructure have empowered asset managers to launch a wider variety of active strategies in ETF form. This growing menu of options caters to investors’ appetite for more tailored outcomes, driving innovation across the industry.

3. Common Active ETF Strategies (with Examples)

Fund managers launch active ETFs using different strategies to appeal to investors with specific goals or preferences. Some of the most common approaches include:

A. Thematic & Growth Active ETFs
Goal: Capture long-term growth by investing in themes such as Artificial Intelligence (AI), robotics, or disruptive technologies.

Example (US): ARK Innovation (BATS: ARKK) — actively selects disruptive growth companies

Example (SG): Lion-Nomura Japan Active ETF (SGX: JJJ) — actively selects Japanese stocks with AI-assisted processes

B. Income & Option-Enhanced ETFs
Goal: Deliver steady income by combining dividends with strategies like covered calls or option overlays.

Example (US): JPMorgan Equity Premium Income ETF – (NYSEARCA: JEPI) uses options to enhance yield

C. Sector / Regional Active ETFs
Goal: Leverage managers’ best ideas in a specific region or sector (e.g. Japan, ASEAN, healthcare)

Example (SG): Active Japan ETF JJJ (SGX: JJJ) – An Active ETF where the manager selects 50–100 stocks tailored to current market opportunities

4. Benefits and Risks: What Investors Should Consider

Benefits

• Potential to beat benchmarks: Active managers can exploit inefficiencies, allocate tactically, and lean into high-conviction opportunities
• Customisation: Investors can express specific views — such as AI adoption or Japan’s recovery — through a single ETF
• Operational convenience: Active ETFs trade on exchanges like stocks, offer intraday liquidity, and usually have lower minimums than traditional mutual funds

Risks & Drawbacks

• Manager risk: Returns depend heavily on the manager’s skill and process. Past performance is no guarantee of future success
• Higher fees: Active strategies are generally more expensive, and over time, higher costs can eat into returns
• Transparency tradeoffs: Some active ETFs limit disclosure to protect proprietary models, which can reduce clarity for investors
• Underperformance odds: Statistically, many active funds fail to outperform comparable passive benchmarks over time

5. How Singapore Investors Might Use Active ETFs

Portfolio Roles

• Satellite allocation: Use active ETFs as satellites around a core passive portfolio (e.g., 5–15% tactical exposure to AI or income)
• Access niche markets: Gain exposure to overseas or tightly regulated markets via locally listed active ETFs without complex account setups
• Income overlay: Replace or complement fixed income with option-enhanced active ETFs for higher distributed yield

Tips for ETF selection

• Understand the manager’s process and look for a track record in comparable mandates
• Check fund fees, turnover, and tax considerations
• Limit allocation to active ETFs to a level consistent with your conviction and risk tolerance (e.g., 5–20% of portfolio)
• Review holdings / performance regularly and watch for changes in strategy or personnel

6. Key Takeaways — Active ETFs

• Active ETFs blend professional management with ETF convenience: intraday trading, tax efficiency, and low operational friction.
• They can deliver differentiated outcomes — alpha, income, or niche themes — but they demand confidence in the manager and come with higher costs.
• They are best used as satellite positions, complementing a low-cost passive core.
• Due diligence is essential: read the prospectus, examine the manager’s process, and evaluate costs and track record.

Conclusion

Active ETFs are reshaping the investment landscape by combining the expertise of active management with the convenience of the ETF structure. They provide opportunities for outperformance, targeted exposure, and innovative income strategies, but they also come with higher costs and the risk of underperformance.

For Singapore investors, active ETFs can serve as useful satellite allocations alongside a low-cost passive core, offering access to niche markets, thematic opportunities, or enhanced income. Success, however, hinges on careful manager selection, disciplined allocation, and regular review.

As the ETF market continues to evolve, active ETFs are likely to play a growing role in portfolios — not as replacements for passive funds, but as complementary tools to help investors navigate a more complex investment environment.

Stay tuned for our next feature, where we explore factor-based ETFs and how they fit into a modern portfolio.