Active, Passive and In-Between
Jun 01, 2026
Historically, most exchange traded funds (ETFs) have been passive. But that's starting to change, with more and more active ETFs coming to market. The growth in active ETFs is largely the result of traditional fund managers realizing that the ETF is a great wrapper and investment vehicle for a broad range of strategies.
The result is that investors have more choice than ever before. Understanding the differences between passive ETFs, fully transparent active ETFs, semi-transparent active ETFs, and Smart Beta strategies is essential to building a portfolio that truly fits your objectives.
📈 Active vs. Passive AUM Growth (2018–2025)
While passive ETFs still command the majority of assets under management, active ETF AUM has grown dramatically over this period — from a small base to well over $1 trillion — reflecting surging demand for professional active management in the ETF wrapper. Source: FactSet
Active vs. Passive ETFs Defined
Passive ETFs
- Designed to track a particular index or sector
- Do not aim to beat the market
- Buying, selling, and rebalancing based on rules-based methodology
- Typically lower fees
Active ETFs
- Designed to outperform a benchmark index or sector
- Helmed by professional fund managers
- May employ a proprietary mix of quantitative and qualitative strategies
- Potential to deliver alpha (risk-adjusted outperformance)
"Both styles of ETFs have merits. Passive ETFs might be the right choice for investors who seek index-like returns and prioritize very low fees. Meanwhile, investors may gravitate toward active ETFs due to a desire to outperform the market — and a belief that their ETF is led by managers with the ability to do so."
Active Fully Transparent ETFs vs. Semi-Transparent ETFs
As with passive ETFs, active ETFs have traditionally been fully transparent — offering investors daily insight into their full list of holdings, in addition to indicative net asset values (NAVs) throughout the trading day. This transparency has its advantages, as many investors want to know exactly what they own.
Some managers, however, are concerned about revealing their proprietary trading strategy. Additionally, managers may be worried about the potential for "front running" — the risk that other market participants, seeing exactly what an ETF is buying or selling, can anticipate their trades.
To combat the potential for front-running, there are a growing number of active, semi-transparent ETFs (approved by the SEC as of May 2019). These ETFs still publish an indicative NAV throughout the trading day, but they don't publish an exact list of their full holdings daily. Instead, they may publish a "proxy basket" of securities that roughly tracks the actual underlying portfolio.
📊 Semi-Transparent vs. Transparent Active AUM (2018–2025)
While transparent active ETFs still hold the majority of active ETF assets, semi-transparent active AUM has grown steadily since SEC approval in May 2019. Growth accelerated significantly in 2022–2024 as more traditional active managers adopted the semi-transparent wrapper. Source: FactSet
Understanding the Different Semi-Transparent ETF Wrappers
Under the umbrella of active semi-transparent ETFs, there are a variety of structures. What they have in common is an attempt to balance the need for transparency with the desire to shield day-to-day trading activity from market participants.
ActiveShares (Precidian Model)
The ETF discloses the full underlying portfolio daily to a representative of the Authorized Participant. Full disclosure to the market happens quarterly.
Shielded Alpha ETFs (Blue Tractor Model)
The full list of holdings is disclosed to the market daily, but portfolio weights are withheld. Complete portfolio disclosure (including weights) happens quarterly.
Active ETFs (T. Rowe Price Model)
A proxy portfolio is published daily. Full disclosure happens quarterly.
Periodically-Disclosed Active ETFs (Natixis Model)
A proxy portfolio is published daily. Full disclosure happens quarterly.
Fidelity ETF
Each trading day, the ETF publishes a tracking basket, as well as the percentage overlap with the actual portfolio. Full disclosure happens on a monthly basis.
Differences in Benchmarking: Active vs. Passive ETFs
Active ETFs have more flexibility to choose their reference benchmark, or even multiple benchmarks. Active ETF managers can then use the securities and financial instruments within their stated strategy to attempt to outperform those benchmarks.
Conversely, passive ETF managers choose a specific method to track their one benchmark. Their selection methodology can be:
Full Replication
The ETF holds every security at the same weight as in the benchmark index.
Optimization
When an index includes more or difficult-to-trade constituents than the ETF can handle cost-effectively, the ETF holds an optimized sample in terms of costs, correlations, and exposure. Almost all fixed income ETFs use this approach because most bond indexes hold thousands of instruments.
Synthetic Replication
The ETF does not buy the underlying securities of its index. Instead, it uses derivatives to swap the performance of the index for a defined fee.
Smart Beta ETFs: A Hybrid Approach
ETFs that combine elements of active and passive approaches employ so-called Smart Beta strategies. These do not track a straightforward index like the Nasdaq-100® or S&P 500. Rather, they create a more complex set of screening, filtering, weighting, and/or rebalancing rules.
This could be interpreted as a hybrid approach: it takes the guidelines an active manager may follow and codifies them into a new Smart Beta index that an ETF can then track. Issuers have expanded into launching ETFs focusing on one or more factors meant to be used to outperform different parts of the economic cycle.
📈 Factor ETF Launches Per Year (2000–2024)
The number of new factor (Smart Beta) ETF launches has grown dramatically over the past two decades — from just 2 in 2001 to a peak of 56 in 2016, before settling into a steady pace of 10–55 launches per year through 2024. Source: FactSet
Mutual Fund & SMA Conversions to ETFs
The popularity of ETFs among investors shows no signs of abating. As a result, some mutual funds, as well as separately managed accounts (SMAs), are converting to ETFs. Conversions allow for active management offered in a form that can be:
More tax-efficient
More liquid & transparent
Potentially lower fees
Converting is not without its hurdles, however. The switch from a mutual fund or SMA to an ETF involves operational challenges, significant communication with investors, and in some cases, shareholder approval.
🔄 Mutual Fund to ETF Conversions by Year
Conversions have grown rapidly: 2 in 2021, 18 in 2022, 19 in 2023, and 35+ in 2024 as more active managers seek the structural benefits of the ETF wrapper. Source: Edgar
Bottom Line
The scope of ETFs has broadened considerably in recent years. Investors can still access a wide range of passive vehicles, but now have the choice of adding active ETFs — in varying degrees of transparency — to their portfolios.
To help ensure you own the ETF that best fits your objectives, understanding the nuances behind the different products is a must. Whether you lean passive, active, or somewhere in between, the ETF wrapper offers a flexible, cost-efficient way to access virtually any investment strategy.