The active ETF explosion: Tools of the trade or tightening the screws for OEICs?

The explosion of active ETFs onto the London Stock Exchange is set to increase pressure on traditional open-ended funds (Oeics) and investment trusts, according to investment professionals, but they are likely to serve more as an “expansion of the toolbelt” rather than to replace existing products. 

This comes following more than a 490% increase in the number of active ETFs available to UK investors over the past five years, according to data from Morningstar. Meanwhile, between the start of 2025 to April this year, the number of active ETFs on the London stock exchange has jumped from 100 to 230, marking a 130% uptick. 

What is causing the meteoric surge of active ETFs for UK investors, and what impact will this have on the investment industry as we know it?

‘The world has changed’ 

Dr Renée Friedman, global head of research at Exante, points out that the world was “a very different place” half a decade ago.

“The macroeconomic and global geopolitical situations have changed. Inflation not only returned, but remained. The market has become a lot more volatile and traditional correlations have broken down. This makes it easier for active managers to demonstrate their value-add to investors.”

But when it comes to active management, there are myriad products for UK investors to choose from. At time of writing (1 June) there are 5,501 funds within the Investment Association universe, the vast majority of which are active. There are also more than 300 investment trusts, according to AIC data. 

Given this, why are so many asset management firms in the UK launching active ETFs now? 

Maximilian Guenzl, co-head of client group at Jupiter Asset Management, says: “Investors increasingly want active management delivered in a lower-cost, transparent, scalable and digitally accessible format. 

“At the same time, Europe remains early in the active ETF adoption cycle, creating a window for credible active managers to establish platform relevance and franchise scale.”

Tom Stephens, head of ETFs at Schroders, says the way portfolios are built has “fundamentally changed”, with platforms, model portfolios and discretionary fund managers becoming increasingly “ETF-first”. 

“The ETF structure removes a lot of operational friction,” he explains. “There’s no transfer agency infrastructure, no dealing complexity, and it’s inherently more scalable across regions.” 

Christine Cantrell, head of EMEA active ETFs at Columbia Threadneedle Investments, points out that the timing in terms of launching these products is structural and not cyclical. 

“The ETF wrapper is now fully mainstream, with deep liquidity and broad adoption. Active ETFs are still a small share of the market, leaving significant room for growth. Policy developments, such as ETF-based retirement solutions, are accelerating adoption and embedding ETFs into long-term savings frameworks.”

Does the US blueprint fit?

From a fund selector perspective, some believe the huge increase in active ETF launches follows on from the ‘tried-and-tested’ success of the structure in the US. 

But while ETFs offer structural tax advantages in the US, this is not the case in the UK or Europe, as the selling of Ucits funds does not trigger capital gains taxes when they are sold internally. 

Nick Maunder, senior fund analyst at Canaccord Wealth, says while Europe and the UK lacks the same structural tax advantages, the ETF wrapper “still offers clear benefits in terms of liquidity, transparency and ease of access, which are resonating with investors”.

“Many firms are moving proactively to establish a presence, recognising that ETFs could become the preferred fund structure for active strategies over time,” he reasons. “This has created something of a ‘land grab’ dynamic, where early entrants have already built meaningful scale and distribution, reinforcing the importance of being involved early.”

Other fund selectors remain more sceptical. Darius McDermott, managing director of FundCalibre, believes the deluge in launches is the result of “classic industry Fomo”. 

“Active ETFs have been a success in the US, but that success is largely driven by tax incentives that don’t exist here,” he argues. “Just because a product works well in one jurisdiction doesn’t mean it translates elsewhere. The asset management industry already overwhelms retail investors with an excess of complex products when all they really need is more simplicity.” 

Rob Gleeson, CIO at FE Investments, says while active ETFs do offer some advantages to UK investors such as lower costs and intraday liquidity, he points out they are “significantly cheaper to set up and run than traditional mutual funds, which is a major reason why we’re seeing so many launches”. He adds: “Many US firms are no longer setting up new funds and are planning on focusing exclusively on ETFs for this reason.”

Dan Kemp, co-founder of Portfolio Thinking, says ETFs benefit the asset manager first and foremost by protecting profit margins, but they can also be advantageous to the end investor. 

“Because active management now faces far greater scrutiny, firms are concentrating new launches on the parts of the market where alpha is genuinely identifiable and reasonably priced. That discipline serves the investor, too.”

Does demand match supply?

Given the huge number of active ETFs launched recently, the natural question is whether demand from investors has matched supply.

According to LSEG Lipper’s latest European ETF Industry Yearbook, which looks at data between the start of 2023 to the end of 2025, newly launched active ETFs have seen an increase in net inflows year after year, suggesting “a real and increasing demand for actively managed ETFs in Europe”.

However, flows into new products are usurping flows into existing active ETFs, suggesting launches are an important growth driver “for this still-young market segment” (see chart below).

Detlef Glow, head of ETF research at Lipper, says: “The ‘real’ competition in this area will start this year, as we now witness the first serious active managers entering the European ETF market with wider product offerings. 

“However, not every company launching an ETF will be successful. I expect the zombie tail to be growing over time, as more and more ETF promoters fight for a small portion of the market.”

At present, the firms that have launched active ETFs for UK investors, which Portfolio Adviser have spoken to, are seeing a healthy appetite for the relatively new suites of products. 

Jupiter’s Guenzl says the firm’s active ETFs are proving popular among DFMs and wealth managers, who he says understand the mechanics of the ETF market better than retail investors. 

“What they have been waiting for is the ability to access high-conviction active management strategies with a clear philosophy and identifiable risk/return profile, in a wrapper that fits neatly into their existing infrastructure,” he explains. 

Schroders’ Stephens also says there has been strong early interest from DFMs and wealth managers, which he believes has been driven by several factors. “First, the strategies themselves are solving real portfolio construction problems: core equity, investment-grade credit, customised exposures. These are building blocks, not niche ideas. 

“Second, there’s a strong alignment with how DFMs run money. They value transparency, they need liquidity and they build portfolios at scale using model-driven processes. And third, there’s a degree of trust transfer. Clients already know Schroders for active management. The ETF wrapper doesn’t ask them to change their investment belief.”

Meanwhile, Steve Dunn, global head of ETFs at Aberdeen, thinks that in the UK, DFMs and wealth managers have historically favoured passive ETFs, although this is shifting. 

“We are seeing early traction. Interest has been strongest in our Future Raw Materials strategy, particularly as a diversifier alongside traditional precious metals exposures such as gold and silver.

“More broadly, retail channels are adopting active ETFs more quickly, which is reflected in flows.”

A threat to Oeics or expanding the toolkit?

With more and more firms launching active ETFs, it poses the question as to whether they could be a threat to Oeics and investment trusts?

Raymond Backreedy, CIO at Sparrows Capital, says active ETFs are “likely to put increasing pressure” on these types of vehicles because investors are “gravitating toward lower-cost, more flexible and transparent ETF structures”. 

“However, this is largely a natural evolution of investment products rather than a major concern, as traditional funds still retain advantages in certain specialist or less liquid areas,” he points out. “Ultimately, greater competition across structures could benefit investors through lower fees and improved access to active management.”

Canaccord’s Maunder says that, while active ETFs do pose “a credible long-term challenge to traditional Oeics and investment trusts in certain areas”, due to lower costs, greater transparency and intraday liquidity, he argues there are “still important hurdles that limit the pace and extent of this shift”. 

“The ETF structure is not suitable for all strategies,” he explains. “ETFs are only as liquid as their underlying holdings, meaning less liquid asset classes are often better suited to open-ended funds or closed-end investment trusts, where managers have greater flexibility around liquidity and portfolio construction.”  

“This is best viewed as product evolution rather than something investors should be concerned about in isolation. Different wrappers will continue to coexist.”

Olga De Tapia, global head of ETF and indexing sales at HSBC Asset Management, believes the pressure on traditional active funds has “largely been driven by market conditions and fee scrutiny over the past decade”, rather than active ETFs alone.

“Active ETFs tend to expand the toolkit, while some strategies – particularly more concentrated or higher-turnover approaches – may remain better suited to traditional fund structures.

“Over time, we expect active ETFs and traditional active funds to coexist, with investors choosing between them based on the desired level of active risk, portfolio concentration, turnover and how they prefer to access the strategy.”

This view is shared by Brett Olson, head of international exchange-traded funds at Goldman Sachs Asset Management, who says traditional funds still play an important role in portfolios.

“What has really changed is how ETFs are being used,” he explains. “Investors are no longer relying on them solely for market beta, they’re increasingly using them to express more targeted views or to play specific roles within portfolios, which has led to a reassessment of where different vehicles fit.”

When asked whether active ETFs could usurp their passive counterparts over the long term, Olson says he doesn’t view it as an “either-or” dynamic. 

“In our view, passive ETFs are likely to continue to play an important foundational role in portfolios as core portfolio building blocks, particularly in areas like model portfolios.”

As such, he also believes active ETFs are “expanding the toolkit”, “often sitting alongside passive exposures to provide more flexibility in portfolio construction”. 

Aberdeen’s Dunn says that active ETFs will not change the landscape for passive ETFs, as active and passive investment styles blend well together in portfolios. And, while he thinks they could change the landscape for Oeics and investment trusts over the long term, they will likely do so “gradually and unevenly”. 

“In the retail/direct channel, the shift is already underway. ETFs are increasingly becoming the vehicle of choice and are likely to continue gaining share at the expense of traditional structures.

“In the intermediary channel, adoption will depend heavily on platform support. Until ETFs are fully integrated into major UK platforms, Oeics and trusts will remain dominant within model portfolios.”

Fractional shares 

Platform optimisation is indeed a stumbling block in the UK, as not all investment platforms support fractional dealing. While UK investors can buy or sell as much as they like when it comes to Ucits vehicles – providing they aren’t soft-closed – this is not always the case with ETFs, which are listed vehicles. As such, some platforms require investors to buy entire shares. 

Portfolio Thinking’s Kemp tells Portfolio Adviser: “The whole share requirement is a particular challenge for DFMs, especially when the share price is high. 

“When a DFM changes a model, it trades for every client in that model at once. But the size of each client’s trade depends on when they invested and on the manager’s rebalancing policy. Some of those trades are very small, and a small trade rarely corresponds to a whole number of ETF shares. 

“The result is a client portfolio that drifts away from the model it is meant to track. This bites hardest on smaller portfolios and on regular savings, which is why ETF-based models tend to carry higher minimum investment levels.”

Daniel Nilsson, senior portfolio manager at Isio Investment Management, is positive on the prospects for active ETFs. However, he explains: “The Isio MPS does not currently invest in them, due to platform functionality issues. A couple of the investment platforms we use are still unable to accommodate ETFs.”

Elsewhere, while some fund selectors are able to invest in ETFs, they are continuing to buy into passive and traditional active funds. 

FundCalibre’s McDermott says: “They’re an extremely efficient way to access markets at low cost, particularly in areas where active managers consistently struggle to add value. 

“We haven’t found a compelling enough case for active ETFs to justify the additional cost and complexity. If we want active management, we’d rather access it through vehicles better designed for it. Just because you can wrap something in an ETF doesn’t mean you should.”

Sparrows Capital’s Backreedy adds: “Active management seldom adds value, and we prefer passive ETFs for their simplicity, broad diversification, and consistently lower fees, alongside their transparent rules-based methodology of index investing.”

Future demand 

While active ETFs are a hot topic among asset managers at present, it is not a dead cert the trend will continue over the long term. Market conditions are fickle, as is investor sentiment.

Exante’s Friedman says much will depends on the rate and speed of investment into technology, in order to smooth the integration across platforms, and how the costs associated with this investment will affect fee structures. 

“However, the regulatory environment is likely to remain supportive, especially as geopolitical uncertainties are likely to persist as the transformation in global trade and alliances realign,” she explains. “The world may become more multipolar, with China and Asia becoming more competitive with the US. 

“Other emerging markets will also likely begin to challenge the status quo more, especially as supply chain development becomes more closely associated with domestic and regional security and political objectives.”

As such, she warns that “not all active ETFs will survive”, with the environment likely becoming more competitive, with consolidation due to fee pressures intensifying. 

She adds: “In 10 years’ time the world may also look very different due to the ability of AI to deliver better performance than active ETF managers, Oeics, or trusts.”