Where do active ETFs fit in portfolios? Four roles investors value most
Active ETFs are not a separate asset class. They are a way of accessing investment strategies. Our research suggests investors are increasingly focused not on whether active ETFs have a role in portfolios, but on what role they can perform.
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Investors often ask where active ETFs fit within a portfolio. The answer depends less on the ETF structure itself and more on the role the allocation is intended to perform.
An active ETF is not a separate asset class, but it is a way of accessing an investment strategy. The active manager determines what the portfolio owns and how it responds to changing risks and opportunities. The ETF structure determines how investors access, trade and hold that strategy.
The flexibility of the structure means investors can use ETFs strategically for core equity and fixed income exposure, or tactically to express views on themes, sectors or duration. As investors focus not only on what to own but also on how to implement their views, active ETFs are becoming more relevant to portfolio construction.
Our latest Schroders Global Investor Insights Survey (GIIS), based on responses from 1,025 investors globally, found that only 6% see no role for active ETFs in their portfolios. The question is therefore shifting from whether active ETFs have a role to where they might fit.
The survey findings suggest investors are using active ETFs to fulfil a range of portfolio objectives. The common theme is not the ETF itself, but the role the allocation is intended to play.
Four uses stand out in the findings:
1. Adding something the portfolio is missing
Almost half of respondents, 49%, say they would value active ETFs for diversification, making it the most selected portfolio role.
Diversification involves more than increasing the number of holdings in a portfolio. It can also mean adding exposure to different investment styles, sectors, regions or sources of potential return.
Active ETFs can complement existing allocations by providing differentiated exposure within a tradable structure. For example, a global equity portfolio with limited exposure to smaller companies could use an active small-cap ETF as a portfolio-completion tool, adding targeted exposure while leaving its core holdings intact.
This may be particularly relevant in markets where investors see greater scope for active decision-making. In fact, other GIIS findings show that respondents particularly value active expertise in small and mid-cap equities, emerging market equities, and thematic or sector strategies. These may be areas where active security selection has a particularly useful role.
An active ETF does not necessarily need to replace an existing allocation. It can instead provide another building block through which investors broaden or refine their exposure.
2. Expressing a view without rebuilding the portfolio
Satellite or tactical positioning is the second most selected role, cited by 42% of respondents.
Many portfolios combine long-term core holdings with smaller satellite positions designed to express a market view, respond to changing conditions or provide access to a specialist strategy. Active ETFs can fit within this approach by offering targeted access to an investment strategy alongside the flexibility of an exchange-traded structure.
For example, depending on their objectives, investors seeking to change the interest-rate sensitivity of a fixed income portfolio could use an active ETF to add shorter- or longer-duration exposure while leaving the strategic bond allocation in place.
The fund manager determines which securities to hold within the strategy, while the investor can buy or sell the ETF on an exchange throughout the trading day. This tradability can be useful when implementation timing matters.
It does not remove investment or market risk, and the price of an ETF can move during the day. However, it gives investors more flexibility over when they implement a decision than a traditional mutual fund, which typically deals once daily.
This is one reason active ETFs can serve both strategic and tactical purposes: the underlying strategy may be actively managed over the longer term, while the investor retains flexibility over how and when it is used.
3. Reshaping an existing source of risk
A third of respondents, 33%, identify risk management as an important potential role for active ETFs.
Risk management can mean different things depending on an investor’s objectives. It might involve adjusting exposure to a region or sector, changing the interest-rate sensitivity of a fixed income allocation, or reducing reliance on a concentrated market index.
An active ETF may help investors make these adjustments without restructuring the entire portfolio. The active manager can respond to risks and opportunities within the strategy, while the investor can use the ETF as one component of the wider allocation.
However, an active ETF is not inherently lower risk than another investment vehicle. Its risks depend on the strategy, its underlying assets and the way it is managed. Investors still need to understand the manager’s investment process, the liquidity and trading characteristics, and how the exposure interacts with the rest of the portfolio.
4. Maintaining exposure while the portfolio changes
Maintaining exposure during portfolio transitions is perhaps the least familiar of the four roles identified in the research, but it is still valued by 29% of respondents.
When investors change managers, rebalance allocations or restructure portfolios, there can be a period between selling one holding and establishing another. Leaving assets in cash during that period may create an unintended gap in market exposure.
An active ETF can provide temporary market exposure while the longer-term allocation is implemented, potentially reducing an unintended period in cash. Because ETFs trade intraday, they may also allow investors to implement changes in stages and choose when to trade during market hours.
Operational simplicity, liquidity and transparency can be particularly relevant in this context. Investors need to understand what they hold, monitor the exposure and make further changes when required.
Start with the portfolio outcome
Taken together, the GIIS findings suggest the discussion around active ETFs is moving beyond cost and towards the portfolio outcomes investors are trying to achieve.
The four roles identified in the survey are different, but they have something in common. In each case, investors are using active ETFs to address a portfolio need: adding a differentiated source of return, expressing a market view, reshaping an existing risk or maintaining exposure while implementing change.
Importantly, one Active ETF = four different portfolio roles that could be performed. The strategy determines the source of return. The portfolio determines the role that return is intended to play. The ETF structure determines how the strategy is accessed, traded and implemented.
A core allocation may call for broad exposure and controlled active risk. A satellite position may place greater emphasis on differentiated insights and manager conviction. A tactical allocation may prioritise flexibility and precision. During a portfolio transition, liquidity and execution may carry greater weight.
The same active ETF will therefore not suit every portfolio role. Investors should begin with the outcome they are trying to achieve and then assess the strategy, manager, underlying holdings, risks, costs, liquidity and trading characteristics. The ETF structure is important, but it is only one part of the investment decision.
As active ETFs continue to develop, the question for investors is becoming less about whether they should use them and more about where they can add value within the broader portfolio.
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