Beyond the track record: refining active ETFs due diligence
Active ETFs demand more than track record checks: assess alpha source, ETF fit, governance, implementation, portfolio role.
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Active ETFs are increasingly being used by investors not simply as a new product format, but as a response to a changing investment and implementation landscape. In many markets, benchmark concentration, faster regime shifts, persistent macro uncertainty and ongoing fee scrutiny have all increased the premium on strategies that can be implemented efficiently, monitored clearly and integrated cleanly into portfolios.
This is part of what we might call a “great convergence”: active investment expertise meeting the efficiency and scalability of an ETF, alongside more deliberate portfolio construction and risk governance. The implication for investors is straightforward. Traditional manager selection questions still matter, but active ETF due diligence needs a wider lens that reflects how the strategy is built, traded and used.
1) Identify the true source of alpha
Begin with the core question: where is alpha actually expected to come from? The objective is to distinguish between performance that happened to be supported by a specific environment and a process that is designed to be repeatable across market conditions.
For professional investors, the most useful discussions are typically those that are explicit about the strategy’s edge, the assumptions it relies on, and the conditions under which it may underperform. The point is not to eliminate uncertainty, but to ensure the return drivers are deliberate and consistently expressed.
2) Check whether the strategy belongs in an ETF (because it won’t always do)
An investment vehicle like an ETF can be a highly effective delivery mechanism, but not every active approach is naturally ETF-suited. The practical test is whether the strategy can accommodate daily liquidity expectations and scale without forcing compromises that dilute the investment thesis.
A further consideration that is easy to overlook is transparency. Depending on the structure and disclosure approach, investors should ask whether transparency requirements could reasonably be expected to influence the alpha process or implementation behaviour. In short, “ETF format” should be an enabling feature, not a constraint that reshapes the strategy in unintended ways.
3) Examine portfolio construction discipline and governance
In active ETFs, portfolio construction is often where outcomes are truly determined. That means understanding not only the intended exposures, but the risk framework that governs how they are expressed: how positions are sized, how risk is budgeted, what constraints are in place, and how quickly exposures can change.
Governance is an essential part of this discipline. Investors should expect clarity on decision rights, oversight, escalation processes and how the strategy is monitored against its objectives. Robust governance does not guarantee outperformance, but it materially improves the likelihood that the strategy behaves as designed, particularly through market stress.
4) Evaluate implementation quality and the liquidity ecosystem
Active ETF outcomes are influenced by more than portfolio ideas. Implementation quality matters, and in the ETF format the trading ecosystem is central: liquidity provision, market making, spreads, and the manager’s approach to trading and execution.
Even where a strategy has a strong process, results can be eroded by frictional costs if execution is not well managed. Because ETFs are traded instruments, resilience across market conditions is also important. Investors should be comfortable that the implementation set-up is designed to deliver the intended exposure efficiently and consistently, including when liquidity conditions are less favourable.
5) Be explicit about portfolio role
Finally, anchor the evaluation in portfolio purpose. What role is this active ETF expected to play? A diversifying source of alpha, a core exposure with a defined risk profile, a tool for managing specific risks, or a building block within a model-based allocation?
Clarity on role informs appropriate sizing, evaluation horizon, success metrics and the right comparator. It also reduces the risk of selecting the ETF primarily because the structure feels convenient or familiar, rather than because the underlying strategy has a clear role and behaves as intended, alongside existing holdings.
The key takeaway
Active ETF adoption has accelerated in recent years, with a growing share of industry innovation occurring in active formats. But we think that the most important point is not the growth itself, but what it implies for due diligence.
The ETF vehicle itself does not create alpha. Alpha comes from the underlying investment process, portfolio construction and implementation discipline. As ETFs increasingly become part of the day-to-day infrastructure through which active exposures are delivered, due diligence needs to evolve with them. For professional investors, that means looking beyond the manager and the label on the vehicle, and taking a joined-up view of how the strategy is expected to generate returns, how risk is governed, how efficiently it can be implemented in real markets, and the specific job it is meant to do in the portfolio.
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