5 Insider Secrets for Picking Winning Actively Managed ETFs (Wall Street Doesn’t Want You to Know)
Forget passive investing—active ETFs just cracked the code on beating the market.
Secret #1: Track Record Trumps Everything
Dig deeper than performance numbers. Hunt for managers who consistently outperform—not just during bull markets.
Secret #2: Fee Structure Decoded
High fees don't always mean better returns. Sometimes you're just paying for fancy offices and Bloomberg terminals.
Secret #3: The Liquidity Loophole
Most investors overlook trading volume. Big mistake. Illiquid ETFs sink faster than crypto during a Fed announcement.
Secret #4: Strategy Transparency Trap
Some funds are 'active' in name only. Demand full disclosure—if they won't show their cards, fold immediately.
Secret #5: Tax Efficiency Edge
Active doesn't have to mean tax-inefficient. Smart funds use loss harvesting better than your accountant ever could.
Bottom line: The best active ETFs combine hedge-fund sophistication with ETF efficiency—leaving traditional mutual funds looking like relics from the analog age.
1. Prioritize the People and Process Over the Product
The greatest risk and, simultaneously, the greatest opportunity in an Active ETF lies not in its ticker symbol or its current holdings, but in the human judgment and systematic process that directs it. Unlike a passively managed ETF, which is designed to be a static index replicator, the success of an Active ETF is directly tied to the skill and decisions of its professional manager or team. This introduces what is known as “manager risk,” the possibility that the manager’s choices may not always lead to favorable outcomes.
To mitigate this risk, investor due diligence must extend beyond analyzing a spreadsheet of holdings. It requires an evaluation of the manager’s background, their proven track of record, and the lineage of the fund itself. Some active ETFs are simply new wrappers for existing mutual fund strategies, which can be a significant advantage for an investor. This provides a valuable history of portfolio holdings, performance, and manager behavior to scrutinize, offering a depth of information that is absent for newly launched funds. This allows the investor to assess the robustness and consistency of the investment strategy over time.
The investment decision is therefore a vote of confidence in a philosophy and a team, not just a list of assets. The manager’s process—their research, analysis, and judgment—is what generates potential alpha, especially in complex markets. For example, in international equities, there is a significant disparity in analyst coverage compared to US stocks. The top 10 stocks in the S&P 500 Index had an average of 68 analysts covering them as of May 2025, while the top stocks in the MSCI EAFE Index averaged only 34. This gap creates opportunities for skilled active managers to uncover insights and capitalize on market inefficiencies that passive strategies might overlook. A successful investment in an Active ETF is not merely in a financial product; it is in the intellectual property and human capital of the fund provider.
2. Look Beyond the Expense Ratio to Uncover True Cost
While the expense ratio is a critical factor, judging an Active ETF solely on this metric can be misleading. A nuanced understanding of “true cost” requires considering the net return after all fees, including any potential outperformance generated by the manager.
When evaluating fees, it is important to contextualize the Active ETF’s position in the market. While they typically have higher expense ratios than Core passively managed ETFs, they are often more affordable than their traditional, actively managed mutual fund counterparts. In some cases, for more complex strategies, the fees of an Active ETF can even be on par with or cheaper than those of their passive peers. This is part of a broader trend where mutual funds are converting to the ETF wrapper to lower costs and improve tax efficiency, demonstrating that active management is becoming more accessible and competitive. The ETF structure, with its lower operational and distribution expenses, enables active managers to offer their services at a lower price point than was previously possible in the mutual fund structure.
This means the primary goal is not to find the fund with the lowest expense ratio, but to identify the one that offers the highest after-fee return. A higher fee can be fully justified if the manager’s skill consistently leads to returns that beat the benchmark, generating the alpha that compensates for the cost. Therefore, investors should carefully review and compare fee structures, including any performance fees, and focus on the value provided relative to the cost.
The following table provides a general comparison of typical fee structures to help illustrate this point.
3. Assess the Strategy’s Suitability and Execution
An Active ETF is best understood not as a standalone product but as an “investment strategy in an ETF wrapper”. The strategy itself must be a good fit for both the ETF format and for the investor’s personal financial objectives.
The first step for any investor is to assess their own financial goals and ensure they align with the fund’s stated objective. The active ETF universe is broad and diverse, with funds designed to achieve a variety of outcomes. Some funds, like the iShares Flexible Income Active ETF (BINC) or the iShares Advantage Large Cap Income ETF (BALI), are explicitly designed to generate income. Others, like the iShares U.S. Equity Factor Rotation Active ETF (DYNF), aim to outperform the broad market by tactically allocating to specific factors such as value, momentum, and quality.
A crucial consideration is how well the strategy fits the ETF wrapper. The ETF format works best for portfolios of highly liquid, widely traded securities. A fund with a strategy that concentrates in hard-to-trade, illiquid assets is a poor fit for the ETF structure because of the need for daily transparency and trading. The inherent value of an active ETF is derived from its ability to execute highly specific strategies that a passive index cannot replicate. For example, a factor rotation strategy can dynamically shift its holdings to capture alpha as market conditions change. A fixed-income ETF can provide access to “hard-to-reach sectors” of the market. The investor’s task is to understand why a particular active strategy is necessary—whether it’s to solve a specific market inefficiency or to fulfill a targeted investment goal. This re-frames the investment from a simple product selection to a strategic decision about portfolio construction.
4. Uncover a Fund’s True Liquidity
A common misconception is that an ETF with low daily trading volume is illiquid and difficult to trade. In reality, an Active ETF’s liquidity is not solely determined by its on-exchange trading volume. The true measure of a fund’s liquidity is the liquidity of its
underlying holdings.
The ETF structure operates on a two-tiered system of liquidity. The first tier is the secondary market, where most investors buy and sell shares on exchanges at market prices throughout the day. This is the volume most retail investors see. The second tier is the primary market, where a crucial group of firms known as Authorized Participants (APs) create and redeem shares. If an Active ETF’s underlying assets—whether they are US large-cap stocks or government bonds—are highly liquid, an AP can easily create or redeem shares to meet investor demand, regardless of the ETF’s daily trading volume. This dual-market structure is what enables an Active ETF to maintain price stability and efficiency.
The “insider” question for investors is not just “What is the trading volume?” but rather “What are the underlying assets, and how liquid are they?” An Active ETF with a low daily trading volume but highly liquid underlying holdings (like S&P 500 stocks) is a more robust investment than a high-volume ETF with illiquid, obscure holdings. The very nature of an Active ETF’s liquidity mechanism serves as a hidden litmus test for the viability of its strategy.
5. Conduct a Full Due Diligence Beyond Past Performance
While historical returns are a factor to consider, past performance is not a guarantee of future results and must be evaluated in context. A full due diligence process requires a holistic view that considers a range of qualitative and quantitative factors.
A critical step is to analyze a fund’s performance against a relevant benchmark, not just in isolation. This is particularly important for Active ETFs operating in markets where passive benchmarks may be of lower quality or less scrutinized, such as certain international equity markets.
The decision to invest in an Active ETF is a strategic portfolio choice, not a simple stock pick. The most successful use of these funds is as a component of a larger, diversified portfolio. They can be used to complement existing CORE holdings, provide targeted exposure to specific sectors, or enhance diversification by targeting investment themes or asset classes. This elevates the investment from a simple product selection to a strategic decision about asset allocation.
To assist in this process, the following table provides examples of top-rated actively managed ETFs across different categories. This is not a recommendation but rather a starting point for further research.
A comprehensive due diligence checklist should include the following:
- Manager and Team: Evaluate the skills, experience, and track record of the portfolio manager.
- Risk and Diversification: Consider the fund’s level of risk and how the manager seeks to mitigate it. Active management can be a tool for diversification by avoiding the concentration risk inherent in some passive indexes, such as those heavily weighted toward a few megacap stocks.
- Tax Efficiency: Note the potential for greater tax efficiency compared to traditional mutual funds, thanks to the unique creation and redemption process that can reduce capital gains distributions.
- Suitability: Consult the product’s official disclosures and, if necessary, a financial advisor to ensure the fund aligns with personal investment goals and risk tolerance.
Frequently Asked Questions
Not necessarily. While Active ETFs generally have higher expense ratios than core passive ETFs, they are often more affordable than their actively managed mutual fund counterparts. Their fees can even be comparable to niche or more complex passive funds, particularly in specialized strategies.
Yes, they can. The idea that ETFs are only for short-term trading is a misconception. Actively managed ETFs are well-suited to help investors build the strategic core of their portfolios, offering diversification and the potential for long-term alpha.
Active ETFs can be more tax-efficient than traditional active mutual funds due to their unique creation and redemption process. This mechanism, which involves in-kind transfers of securities rather than cash, can help reduce the capital gains distributions that are often passed on to shareholders in mutual funds.
No, this is a common myth. An ETF’s daily trading volume is not necessarily a reliable indicator of its liquidity. The true measure of liquidity is the liquidity of the fund’s underlying holdings. If the underlying stocks or bonds are highly liquid, Authorized Participants can easily create or redeem shares to meet investor demand, ensuring a smooth trading experience regardless of the volume on the secondary market.
The proliferation of Active ETFs was enabled by regulatory changes in 2019 that allowed for greater flexibility in their structure. This regulatory evolution coincided with a growing desire among investors for a vehicle that combines the potential for professional active returns with the structural benefits of the ETF wrapper, such as liquidity, transparency, and tax efficiency.
