Investors today face a wide range of investment vehicles, from passive index funds (ETFs) to actively managed funds. More recently, however, a new concept has emerged that blurs the line between both approaches: The active ETF. This is an actively managed investment fund in the format of an exchange-traded ETF.

A classic active fund (also: Actively managed fund), by contrast, is a traditional investment fund with active management that is typically not traded continuously on an exchange. This new combination promises to bring together the advantages of both worlds: Active investment decisions, plus the flexibility and cost efficiency associated with an ETF.

What is an active ETF, and how does it differ from a classic active fund?

In this article, we answer, among other things:

• What is an active ETF?
• How does an active ETF work compared with a classic fund?
• How do the costs of ETFs and active funds differ?
• How do active ETFs and active funds differ in risk management?
• What does the bid-ask spread mean for ETFs, and why does it matter?
• Active ETF or active fund: Which is better?

• Conclusion: Active ETF vs. active fund, the key differences

   

What is an active ETF?

An active ETF is essentially an actively managed fund in an ETF wrapper. That means: Unlike passive index ETFs, a portfolio manager actively steers the portfolio composition. Instead of following an index mechanically, the management team decides which securities to buy or sell, in what weights, and when.

The objective of an active ETF is typically to outperform a benchmark index or to meet specific targets, such as lower volatility, more regular income, or improved protection against drawdowns compared with overall market development.

For investors, an active ETF combines two approaches: The expertise of active fund management, and the flexibility and transparency of an exchange-traded ETF. Active ETFs can react quickly to market changes and often provide daily insight into the portfolio. As a result, they are frequently more transparent than traditional investment funds.

This structure is still relatively young, but it is gaining relevance. That said, there are clear differences in how it works, how costs arise, and which risks matter compared with a classic active fund.

A central structural feature for investors is intraday tradability: Units can be bought or sold continuously during exchange trading hours. Many active ETFs also provide more frequent insight into portfolio holdings than classic active funds. One important point: Classic active funds can also react to market changes. Continuous exchange trading, however, is a typical characteristic of the ETF wrapper.

When comparing ETFs, active ETFs and classic funds, it pays to look at the details. An increasing number of active funds are also tradable via exchanges. Higher transparency can be helpful for investors, but it can also have a downside for the fund: If positions become visible very quickly, trading intentions can be inferred more easily, strategies can be replicated more readily, and in less liquid segments this can increase transaction costs or create competitive disadvantages.

How does an active ETF work compared with a classic fund?

The most important differences appear in three areas: Tradability and structure, transparency and information flow, as well as dealing and liquidity.

• Tradability and structure: A core difference is how investors buy and sell units. ETFs, including active ETFs, are traded on an exchange, not directly via the fund company. That means: Units can be bought and sold continuously (intraday) during exchange hours. The price is formed through supply and demand on the exchange, similar to equities.

  The exchange price is continuously quoted via bid and ask prices, typically provided by market makers. These prices are usually anchored to the value of the fund portfolio and the underlying holdings.

  Classic active funds, by contrast, are traditionally traded via the management company or a bank. Pricing typically occurs once per day at the net asset value (NAV). If you subscribe to or redeem units of a typical investment fund, you receive the price at the end of the day (or the next valuation day).

  This difference can make ETFs more liquid and flexible for short-term adjustments. However, the exchange price of an ETF can deviate slightly from the fund’s underlying value during the day, whereas in a classic fund all investors receive the same end-of-day price.

• Transparency and information flow: ETFs are generally required to disclose their portfolio very frequently, often daily, so investors can see what the fund holds. An active ETF does not replicate an index, but it often publishes its current positions, or at least an indicative composition, on a daily basis. A traditional fund often reports holdings monthly or quarterly.

  For investors, this means: Active ETFs typically offer higher transparency. You can track the portfolio composition close to real time. With an active fund, you rely more on periodic reporting.

• Dealing and liquidity: Because ETFs trade on exchanges, they have specific mechanics. Professional market makers and authorised participants use creation and redemption processes to help keep the ETF price close to the value of the underlying portfolio. ETF liquidity therefore depends on both exchange trading activity and the liquidity of the underlying assets. With sufficient trading volume, ETFs can be bought and sold efficiently.

  A classic fund is typically tradable at NAV (as long as there are no extraordinary circumstances such as a suspension of redemptions), but not intraday.

  In practice, boundaries can blur: Some traditional active funds have share classes listed on exchanges and can be traded similarly to ETFs. These cases remain exceptions. As a rule, an active ETF is an exchange-traded vehicle with continuous pricing, while a classic fund often relies on direct dealing at the daily NAV.

   

How do the costs of ETFs and active funds differ?

In addition to tradability, many investors focus on the cost structure. Which fees arise for active ETFs versus active funds?

• Ongoing costs (TER): Classic actively managed funds often have comparatively higher annual fees for management and administration, frequently around one to two percent per year. Active ETFs also tend to be more expensive than passive index ETFs, but they are often cheaper than classic active funds. In practice, many active ETFs have a total expense ratio (TER) of only a few tenths of a percentage point, while active retail funds often charge more than one percent per year. The cost advantage can be driven by more efficient ETF structures and competition with passive products.

  For investors, this means: Ongoing fees are often lower for an active ETF than for a comparable active fund, which can matter over long investment horizons due to compounding.

• Transaction costs and costs when buying or selling: Another difference concerns one-off costs. Classic funds often charge an upfront subscription fee, for example three to five percent, which reduces the invested amount immediately. Today, there are share classes without subscription fees or discounts via intermediaries, but historically this has been a real entry hurdle.

  ETFs typically have no subscription fee. You buy at the current exchange price. However, ETF trading involves brokerage fees and the bid-ask spread. These costs are indirect and depend on the venue and the liquidity of the ETF. Overall, ETFs can often be cheaper to buy for retail investors, especially for smaller amounts or savings plans (many brokers offer ETF savings plans without fees). For larger allocations, direct fund access without a spread can be advantageous.

• Comparability and the net outcome: Costs should never be viewed in isolation. A low TER does not automatically mean a better investment, and a higher subscription fee is not automatically bad. What matters is the net outcome after costs. Higher fees can be justified if the fund management delivers meaningfully higher returns or lower risk. Conversely, even the lowest fee structure is of limited value if the strategy performs weakly.

  Investors should therefore consider both costs and outcomes. In some segments, such as broad, highly efficient equity markets, low costs can be a major advantage because active managers often struggle to outperform after fees. In other areas, such as Multi Asset concepts or specialised fixed income strategies, the cheapest solutions can underperform if they avoid important segments or provide less risk management.

• In short: Active ETFs often benefit from a lower TER and no subscription fee, while classic active funds can have higher explicit fees. ETFs, however, involve trading costs (broker fee and spread) that a classic fund does not have in the same way. Investors should evaluate both vehicles across the full cost picture and focus on expected net performance after costs.

   

How do active ETFs and active funds differ in risk management?

Costs matter, but so does the question of how each approach manages risk.

• Market risk and active risk management: An ETF can be passive or active. In passive index ETFs, investors largely bear systematic market risk one for one: If the index falls, the ETF falls. Active counter-steering or hedging is not part of the design.

  Active ETFs, by contrast, allow management to steer the portfolio and, depending on the strategy, implement risk measures via reallocations, liquidity allocations or hedging strategies. The decisive factor is therefore not the label “ETF”, but whether, and how, the mandate is actively managed. Actively managed approaches have at least the possibility to react to risks, for example by holding more liquidity, shifting towards more defensive exposures, or using derivatives for hedging.

  Robust active risk management aims to limit large losses in downturns and to steer portfolio volatility. Especially in Multi Asset or wealth management approaches, active shifts between asset classes are used to keep the risk profile aligned with objectives.

• Diversification and index constraints: Active management can also help avoid structural issues in indices. Many indices are market-cap weighted, which can create concentration risks. In global equity indices, a small number of large technology names can dominate. In bond indices, highly indebted issuers can carry heavy weights (the more debt, the larger the index weight). Active funds can counter-steer by setting position caps, selecting more deliberately, and managing exposures more independently. In stress phases, broader diversification and independent weighting can reduce the impact of losses in individual positions compared with a concentrated index structure.

• How “active” is an active ETF? Active ETFs are not equally active. The line to passive investing can be fluid. Some active ETFs do not track an index, but still stay close to a benchmark and deviate only marginally. Others run genuinely independent security selection without close benchmark ties. Classic active funds show the same spectrum.

  For investors, this means: Look closely at how much active risk management actually takes place. A fund that is called active but behaves largely like an index can offer limited advantages over an index ETF while still charging higher fees.

• Outperformance potential and management risk: Active management, whether in ETF or fund format, introduces an additional risk: Management risk. There is no guarantee that an active manager will outperform the market. Poor judgement, timing issues or unfavourable outcomes can lead to underperformance after costs, meaning returns below the market return.

  The potential benefit of active risk management depends strongly on the quality of the investment process. A strong process can reduce drawdowns or achieve similar returns with lower volatility. A weak process can underperform an index approach.

In short: Active ETFs and active funds can offer targeted risk steering and the potential for added value, but they also bring the risk of wrong decisions and underperformance that a pure index ETF does not have.

What does the bid-ask spread mean for ETFs, and why does it matter?

Beyond strategy and risk steering, ETFs have technical aspects investors should understand. A key term here is the bid-ask spread.

Definition: The bid-ask spread is the difference between the buying price and the selling price of a security on an exchange. The bid is the price a buyer is currently willing to pay for an ETF unit. The ask is the price a seller requests. The difference is the spread.

The smaller the spread, the more liquid the instrument. If the spread is wide, there is a larger gap between buy and sell prices, and trading becomes implicitly more expensive.

Why it matters for ETFs:When trading ETFs (including active ETFs), the spread is an implicit cost. It is the price paid for immediate tradability.

Example: If the ask price of an ETF is EUR 100.00 and the bid price is EUR 99.50, the spread is EUR 0.50, or 0.5 percent. If you were to buy and immediately sell, you would lose this 0.5 percent through the spread.

In liquid ETF markets, for example large ETFs on broad equity indices, spreads are typically small, often only a few basis points, as market makers support tight pricing. In niche markets or less frequently traded ETFs, spreads can be materially higher. This can also apply to active ETFs if trading volume is lower or if the portfolio invests in less liquid segments. In turbulent phases, spreads often widen further.

The practical implication: The spread increases the actual trading cost of an ETF investment. The TER covers annual operating expenses, but not exchange trading costs. Investors who trade frequently, or allocate large amounts, should factor the spread into their decision.

For long-term retail investors who trade only occasionally, small spreads are typically manageable. But for specialised ETFs or larger allocations, a high spread can reduce part of the ETF’s structural cost advantage.

This is one reason why some professional investors do not implement every exposure through ETFs. In specialised areas, investing directly into a fund at NAV can, in some cases, be more efficient than trading an ETF with a wide spread.

In short: The bid-ask spread is a relevant cost factor for ETFs, particularly in less liquid markets. Investors should prefer more liquid ETFs where possible and place orders thoughtfully, for example using limit orders, so the spread remains lower and tradability stays an advantage.

Active ETF or active fund: Which is better?

The obvious question is: Which investment vehicle is the better choice, an active ETF or a classic active fund? The answer is: It depends. Both have strengths and weaknesses, and what fits best depends on objectives, the market segment and investor needs. There is no universal winner. Rather, active ETFs and active funds can complement each other depending on the situation.

Advantages of active ETFs

• An active ETF can suit investors who value flexibility and cost efficiency. Investors with a more tactical approach benefit from being able to enter and exit quickly, for example to implement opportunities or reduce risk promptly. Intraday tradability and the liquidity of large ETFs can be advantages.
• Transparency-oriented investors may also prefer ETFs because they can track portfolio composition more closely. The cost structure is often favourable: No subscription fees, and often lower ongoing charges, which can be advantageous over long horizons due to compounding.
• For broad standard exposures (for example global equities and large indices), an active ETF can be an attractive solution: Active steering without fully giving up the structural cost benefits of the ETF format.

Advantages of classic active funds

• There are also scenarios where a traditional active fund can be the better fit. Long-term investors for whom daily tradability is less important often place more weight on a consistent investment process and, in some contexts, access to deeper dialogue around the strategy.
• In niche markets or less liquid strategies, a classic fund can have advantages: It does not need to support continuous exchange liquidity and can invest in less easily traded securities without the investor-facing spread being the central cost element. This can allow broader universes, for example in specialised strategies that are not easily implemented in an ETF structure.
• A classic active fund can also offer different share classes (for example for institutional investors with lower fees or without subscription fees), which can suit different investor groups.

"The right vehicle for each objective"

That principle summarises the decision well. For broad, efficient markets (for example global large cap equities), cost-efficient ETFs, passive or active, can be sensible because cost discipline and liquidity often dominate. For specialised themes (for example narrow sector portfolios, emerging market high yield bonds, or complex derivative strategies), an active specialist fund can be more suitable because it can offer greater flexibility in implementation.

Investors should know their own profile: Those who want tactical flexibility may value the ETF format. Those who invest strategically over the long term may focus more on the investment process and the track record of the management team. Whether that is delivered via an ETF or a fund can then be secondary.

Not “either-or”, but “both-and”

It can be entirely reasonable to combine active ETFs and active funds within one portfolio. For example, an investor might use an active factor ETF as part of the core portfolio while investing in a specialised active fund for a less liquid fixed income segment. The decisive point is to understand and weigh the differences: Costs, liquidity, transparency, strategy and risk management. This enables selecting the right vehicle for each investment objective.

Conclusion: Active ETF vs. active fund, the key differences

An active ETF is ultimately an actively managed fund in an ETF structure. The key difference compared with a classic active fund is not the investment objective, both seek to create added value through deliberate security selection relative to the market. The difference lies in structure and operating conditions.

• Active ETFs trade on exchanges, which provides flexibility and continuous pricing. They are often more cost-efficient and frequently offer daily transparency on holdings.
• Classic active funds are traditionally dealt directly at NAV, which provides stable end-of-day pricing and can enable access to specialised strategies. They often come with higher ongoing costs and less intraday flexibility.
• In short: An active ETF differs from a classic active fund mainly in tradability, costs and transparency, while the investment philosophy of active management can be shared by both. Which vehicle is preferable depends on the investor’s objectives.

Both have a role: Active ETFs can be well suited for broad, liquid markets, while active funds can be compelling in specialised areas and for specific requirements. For investors, it is less a question of “either-or” and more about understanding the differences. Anyone who understands what an active ETF is, and how it differs from a traditional fund, can use that insight to make more conscious and informed investment decisions.