Active management is increasingly finding a home in the ETF wrapper as investors look beyond traditional index-tracking strategies for more targeted sources of alpha. The trend has been particularly pronounced in the U.S., where active ETFs have captured a significant share of flows (up to 30 percent in 2025), while Europe is entering a more recent phase of rapid growth. Antoine Lesné, Managing Director at State Street Investment Management and Head of ETF Specialists for EMEA, sees the European market as “crawling like a baby behind” the U.S., entering a new phase of development driven by both established ETF providers and newcomers bringing more strategies into the wrapper.

From enhanced strategies to broader active management

The ecosystem of active ETFs in Europe has developed in two distinct phases. The first was dominated by established issuers offering “enhanced” strategies: products that retained many of the characteristics of index investing while introducing systematic tilts, exclusions or other sources of incremental alpha. “The first phase was a few issuers launching more enhanced-type active ETFs, not very active from an alpha standpoint,” says Lesné. These strategies maintain relatively low tracking error, providing a natural bridge between passive and active management.

“The first phase was a few issuers launching more enhanced-type active ETFs, not very active from an alpha standpoint.”

Antoine Lesné, Managing Director at State Street Investment Management and Head of ETF Specialists for EMEA.

The second phase has emerged over the past two years, as a broader group of issuers entered the market with more differentiated active and alternative products. Many are not traditional ETF providers but see an opportunity to participate in a market they had previously missed. “Oftentimes, it has not been coming from the traditional ETF issuers, but from newcomers trying to say, ‘play catch up and be part of this big ETF growth story,’” Lesné says.

That expansion has led to a proliferation of products, though not necessarily a commensurate increase in assets. More recently, established ETF providers such as State Street have also moved further into active and alternative strategies, bringing their expertise in ETF construction, portfolio implementation, market making, liquidity, trading and distribution. “We know there are exposures and strategies that can be put into an ETF structure,” says Lesné.

Investors are becoming more comfortable with the ETF wrapper

The growth of active ETFs is also being driven by changing investor perceptions of the ETF itself. While ETFs remain closely associated with passive investing, institutional investors are increasingly treating the structure as a flexible vehicle through which different investment strategies can be accessed. “The ETF wrapper is something that investors have started to become more and more used to,” explains Lesné. “They like transparency and the ability and ease of buying a strategy through that vehicle.”

“The ETF wrapper is something that investors have started to become more and more used to. They like transparency and the ability and ease of buying a strategy through that vehicle.”

Antoine Lesné, Managing Director at State Street Investment Management and Head of ETF Specialists for EMEA.

The broader motivation is the search for alpha. Strategic and tactical asset allocation can contribute to portfolio returns, but investors can also seek alpha within individual building blocks of their portfolios. “Investors also can and want to generate alpha through active management on a specific building block of the allocation,” observes Lesné. This helps explain demand for enhanced or beta-plus ETFs, which retain broad, diversified exposures while allowing managers to add different layers of active positioning through sector and industry tilts, factor exposures, stock selection, exclusions or other systematic overlays.

Lesné sees these strategies complementing, rather than replacing, core exposures. “They are not antinomic,” he says. “You will continue to see a strong rise of flows towards core building blocks. But in some cases, as a long-term investor, you also want to put some of your money to work a little bit more.”

Active fixed income could be the next wave

Lesné expects these enhanced strategies to continue seeing relatively strong adoption, and also sees the longer-term opportunity in fixed income. “Active fixed income is one of the key growth areas,” he says. Fixed income ETFs continue to attract flows, while the share directed to passive strategies has recently shown signs of levelling off. Lesné sees this as a potential sign that investors increasingly recognize the value of active management in credit markets in particular, where securities can differ significantly in structure, liquidity and risk. “The active ETF route could become the next wave of flows towards fixed income in general.”

CLO ETFs illustrate the shift toward alternative credit

Collateralized loan obligation ETFs have been one of the clearest examples of this development. According to Lesné, CLO ETFs have accounted for around 40 percent of flows into active fixed income ETFs in Europe. The appeal is partly linked to the different characteristics of CLOs compared with traditional duration-heavy fixed income exposures. “It fits a need from an asset allocation standpoint because there has been relatively poor performance from duration-heavy fixed income assets,” Lesné says. “CLOs have been relatively stable and offer more attractive spreads.”

“With more efficient capital treatment for securitized and collateralized assets, we expect some insurance companies could start building exposure through ETFs.”

Antoine Lesné, Managing Director at State Street Investment Management and Head of ETF Specialists for EMEA.

Regulatory developments have supported the emergence of CLO ETFs. Lesné points to Luxembourg and Irish regulators allowing CLOs to be wrapped into ETF structures, initially with a focus largely on the AAA segment and some flexibility to move down the credit spectrum. A second development is the changing regulatory treatment of securitized assets. The revised rules, including changes relevant to Solvency II, are due to take effect at the beginning of 2027 and are expected to make the capital treatment of certain securitized or collateralized assets more efficient for insurers. “With more efficient capital treatment for securitized and collateralized assets, we expect some insurance companies could start building exposure through ETFs,” he says. Europe, he adds, has been at the forefront of this particular development.

The next frontier: fundamental active ETFs

The next stage of the market could take active ETFs further away from the enhanced strategies. “The next frontier for active ETFs is going to be more fundamental management,” Lesné says. “There is no reason you cannot have access to those strategies either.” Moving fundamental strategies into an ETF structure raises a different set of operational and investment questions. The technology of the wrapper is only one part of the challenge. Managers need to consider how liquidity is provided, how trades are executed, how orders reach portfolio managers and how baskets or model portfolios are shared.

“The next frontier for active ETFs is going to be more fundamental management. There is no reason you cannot have access to those strategies either.”

Antoine Lesné, Managing Director at State Street Investment Management and Head of ETF Specialists for EMEA.

Established issuers face a different due-diligence hurdle

Established ETF providers have an advantage as active strategies expand within the ETF wrapper: they already understand the ecosystem, from market structure and liquidity provision to investor behavior. But that familiarity does not mean investors can apply the same due-diligence framework to every strategy offered by an established issuer.

Lesné points to the distinction between an issuer’s indexing capabilities and its active investment businesses. Institutional investors may conduct extensive due diligence on an established provider’s systems, processes, risk management and compliance when assessing its indexing platform. That can create a high degree of comfort with the provider, but the same level of confidence does not automatically extend to active ETFs, where different investment teams, processes and sources of alpha may be involved. 

“You can say, ‘I’m taking State Street Investment Management as an ETF issuer, and I’m comfortable with the platform as a whole,’” Lesné says. “They look at our systems, processes, risk management and compliance and say, ‘Okay, I’m comfortable with how you manage indexing.’” For traditional index products, that familiarity can effectively amount to an “almost blank check” for the issuer’s indexed exposures. 

Active ETFs require a different level of scrutiny. “When you launch an active ETF, you may have a different investment team and a different selection process,” Lesné says. “That’s where we see our partners and investors starting to ask different questions and follow a different due-diligence process.”

The distinction will become increasingly important as active ETFs move beyond enhanced beta into fixed income, alternative credit and more fundamental strategies. The ETF wrapper can provide the transparency, liquidity and accessibility investors expect, but it says little about the investment approach underneath. As the universe expands, investors will need to look beyond the wrapper and assess the investment process, portfolio construction, liquidity and capacity on their own terms.