Active / Passive series · Research
Active or passive: what are you actually buying?
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An ETF tells you how an investment is packaged and traded. Active or passive tells you something about how its portfolio is chosen. Neither label tells you enough about what you will own.
Two ETFs can hold many of the same companies even though one is active and the other follows an index. Two passive ETFs can give you very different exposures. Before comparing the labels, it helps to establish who makes the investment decisions, what those decisions aim to achieve and how much room there is to depart from a benchmark.
Who decides what goes in?
An index-tracking ETF aims to follow a specified index. The index rules determine the eligible investments and how they are weighted. The fund manager implements that mandate. Tracking may involve holding all the constituents, a representative sample, or using derivatives, depending on the fund’s documents.
An active ETF gives its manager discretion over portfolio composition within the stated investment objective and policy. That is the distinction in ESMA’s explanation of active management. It does not mean unlimited freedom: a manager can be constrained by geography, sector exposure, credit quality or the amount of risk it may take relative to a benchmark.
Both can trade on an exchange during the day. Buying an active ETF does not mean abandoning the ETF wrapper, and buying an ETF does not automatically mean buying an index fund.
Four ways an ETF can be managed
Our four anonymous UCITS examples illustrate different approaches. They are selected to explain the labels, rather than to rank products. Their identities and official documents are in the methodology note.
| Example | What determines the exposure? | What does the benchmark do? | What are you buying? |
|---|---|---|---|
| A · Broad developed-world index tracker | The fund seeks to follow MSCI World, using an optimised portfolio. | Sets the return the fund aims to track. | Developed-market equity exposure shaped by the index’s eligibility and weighting rules. |
| B · Quality-factor index tracker | A sector-neutral quality index selects and weights companies using defined rules. | Sets the target exposure and return. | A quality tilt within developed equities, rather than an unrestricted manager’s stock picks. |
| C · Research-enhanced active equity ETF | Manager research informs active portfolio decisions, with risk managed relative to a benchmark. | Provides a reference for portfolio construction and performance assessment. | Active decisions intended to add value while staying relatively close to the benchmark. |
| D · Index-tracking covered-call ETF | A buy-write index specifies an equity-and-option strategy; the ETF obtains its exposure synthetically. | Defines the strategy return being tracked. | An option-based payoff, rather than the full upside and downside profile of a plain equity index. |
Classification checked against official sources on 20 October 2026. These examples have different mandates and are not interchangeable alternatives. They are research supplements; inclusion in Rogha Explore and broker availability have not been verified for this study.
Passive does not mean a neutral portfolio
Someone chooses the index rules. They decide which markets qualify, which companies enter, how weights are assigned and when the index is reviewed. Selecting an index is therefore a meaningful investment choice, even when the ETF follows it without discretionary stock selection.
Example B makes this easy to see. Its quality approach favours characteristics such as profitability, earnings stability and lower financial leverage. Those are deliberate preferences. They are expressed through index rules rather than a manager deciding each day which companies look attractive.
A narrow sector or thematic tracker can also be passive. It can still be concentrated and volatile. Conversely, an active portfolio can hold a wide spread of investments. The label describes the decision process; concentration and risk require a separate look at the exposure.
Active does not necessarily mean very different
Example C uses research to make active decisions while keeping its portfolio relatively close to its benchmark. The manager can favour some stocks and underweight others without turning the portfolio into a concentrated collection of unrelated bets.
That is why holding familiar companies does not disprove active management. The difference may lie in their weights. Equally, the word “enhanced” does not establish that a fund will outperform. The objective is something to evaluate against subsequent results, after costs.
There are two separate questions: does the manager have discretion, and how different is the resulting portfolio? A holdings comparison can help with the second. It cannot, on its own, answer the first or establish investment skill.
Rules and options do not settle the classification
A systematic active manager can use models and repeatable rules. What matters is whether the fund’s mandate is to track an index or permits discretionary portfolio decisions. “Rules-based” is not a sufficient classification by itself.
Covered calls provide another useful test. Example D is explicitly index-tracking, although its strategy involves options. Its synthetic implementation also means that the securities in its basket should not be mistaken for its complete economic exposure. An active covered-call mandate could instead allow decisions about the equity portfolio or option positions. Read the policy rather than classifying the fund from the presence of derivatives.
Decision process: tracking an index or allowing manager discretion.
Portfolio difference: staying close to a reference market or taking substantial departures.
These are separate dimensions. Neither is a scale from safe to risky or from poor to good.
What should you compare?
Start with the investment objective. Is the fund trying to track a return, outperform a reference, generate income or deliver a particular outcome? A benchmark may be a target to replicate, a constraint, a performance comparator or simply contextual information. Seeing an index name on a factsheet does not settle which role it plays.
Then examine the portfolio: largest positions, country and sector weights, cash and derivative exposure. Check how frequently holdings are published and what date they describe. A current holdings file is a snapshot, not a record of every decision taken during the year.
Turnover answers a different question again. A passive fund can trade when an index changes or portfolios need adjustment; an active manager can hold a position for years. Frequent trading is not the definition of active management. Compare reported turnover only when periods and calculation methods match.
Finally, examine costs and results against a fair alternative. Do not assume every active ETF is more expensive than every passive ETF. Ongoing charges, transaction costs and dealing costs need to be checked for the actual products. A performance comparison also needs compatible markets, currencies, benchmark return conventions and dates.
The useful question is what decisions you are paying the fund to make. In a tracker, you are buying implementation of an index you have chosen. In an active ETF, you are also delegating investment choices within a mandate. Understanding that mandate comes before deciding whether its price or results are convincing.
Explore further
Read our Learn guides on what an ETF tracks, ETF replication and diversification. Use Explore ETFs to research fund characteristics.
What do you think?
We welcome comments, questions and corrections. Email hello@roghaetf.ie.
Read the methodology, product identities and official sources.