Hilton Capital Management

Understanding Active ETFs

Explore Active ETFs: Learn what differentiates them from other ETFs and why they're becoming increasingly attractive to today's investors.

Investors increasingly want professional portfolio management without sacrificing liquidity, transparency, or tax efficiency. Active ETFs aim to deliver both—and they've become one of the fastest-growing segments of the investment industry.

As of May 2026, active equity and fixed income ETFs represented approximately 11% of the U.S. ETF market, with about $1.7 trillion in assets under management, reflecting growing investor demand for actively managed strategies in an ETF structure.

In this guide, we’ll cover:

What an active ETF is
How active ETFs differ from passive ETFs
The potential benefits and risks
How to evaluate an active ETF
Key factors to consider before investing

What Is an Active ETF?

An exchange-traded fund (ETF) is a pooled investment vehicle (fund) that holds a portfolio of securities, such as stocks or bonds.

Investors can buy and sell ETF shares, which represent proportional ownership of the underlying assets and fund performance. Shares are traded on an exchange, such as the New York Stock Exchange (NYSE), Nasdaq, or London Stock Exchange (LSE).

ETFs are issued and managed by asset management firms, investment banks, and other financial institutions and are widely available to investors globally.

An Active ETF combines the trading flexibility and accessibility of the ETF structure with professional, active portfolio management.

Unlike their passive counterparts that commonly track an index, active ETF investment professionals make investment decisions, including security selection, sector allocation, and portfolio positioning, to pursue specific investment objectives.

financial investors reviewing charts and data

The Evolution of Active ETFs

Exchange-traded funds (ETFs) were introduced in the early 1990s as a flexible, lower-cost alternative to many traditional mutual funds. The first ETF, the SPDR S&P 500 ETF (SPY), launched in 1993 and helped popularize index-based investing by providing investors with diversified market exposure through a single, exchange-traded security.

Active ETFs are a more recent innovation. The first actively managed ETF launched in 2008, but adoption accelerated after the U.S. Securities and Exchange Commission’s (SEC) Rule 6c-11 took effect in 2019, simplifying the regulatory framework for launching ETFs.

Since then, Active ETFs have experienced rapid growth as investors increasingly seek professionally managed strategies within the ETF structure. Today, Active ETFs span virtually every major asset class and investment style, giving investors access to a broad range of actively managed investment solutions.

financial investors reviewing data on conference table

Active vs. Passive ETFs: Key Differences

While both Active and passive ETFs offer the benefits of the ETF structure, they differ in how portfolios are managed, how investment decisions are made, and the costs investors may incur. Understanding these differences can help investors determine which approach best aligns with their financial goals.

At-a-Glance: Active vs. Passive ETF Comparison

Feature	Active ETFs	Passive ETFs
Management	Portfolio managers actively select securities and adjust the portfolio based on research, market conditions, and investment opportunities.	Tracks a specific index (like S&P 500) or benchmark using a rules-based approach.
Costs	Higher average expenses (~0.39%) due to research, active trading, and management team costs.	Lower average expenses (~0.12%) due to automated approach with less human intervention.
Trading	Often less liquid with wider bid-ask spreads, which can mean higher trading costs and more price variation from NAV.	More liquid with tighter spreads, making them easier and potentially cheaper to trade.
Flexibility	Can shift to defensive positions during market downturns and capitalize on specific opportunities as they arise.	Must stay fully invested according to index weights regardless of market conditions.

Investment Approach

Active ETFs seek to achieve specific investment objectives—such as capital appreciation, income generation, or risk management—through active security selection and portfolio management. Passive ETFs, by contrast, are designed to replicate the performance of an index or benchmark.

Management Style

Passive ETFs follow a rules-based methodology designed to track a specific benchmark. Active ETFs rely on experienced portfolio managers to make investment decisions and adjust portfolio allocations as market conditions evolve.

Trading & Pricing

Like all exchange-traded funds, Active ETFs trade on stock exchanges throughout the trading day, enabling investors to buy and sell shares at market prices. Unlike mutual funds, which are priced once daily after the market closes, ETFs offer intraday trading and support a variety of order types, including limit and stop orders.

An ETF's share price is generally based on the value of its underlying holdings, known as its Net Asset Value (NAV), calculated as the value of the ETF's holdings minus liabilities, divided by the number of shares outstanding. However, because ETF shares trade on an exchange, market supply and demand can cause the share price to trade at a slight premium or discount to its NAV.

Compared to passive ETFs, Active ETFs may experience

Lower trading volumes, which can result in reduced liquidity
Wider bid-ask spreads, potentially increasing trading costs
Greater potential to trade at a premium or discount to NAV, particularly during periods of market volatility

These characteristics generally reflect trading activity and market liquidity rather than the quality of the fund's underlying portfolio.

Cost Structure

An ETF's cost is typically expressed as its expense ratio, the annual fee investors pay to cover the fund's operating and management expenses. The expense ratio is calculated as a percentage of the fund's average net assets.

For example, an ETF with a 0.50% expense ratio would cost approximately $5 annually for every $1,000 invested ($1,000 x 0.50%).

Active ETFs typically carry higher expense ratios than passive ETFs due to the costs associated with management, research, and more frequent trading. Across equity and fixed income, the average passive ETF expense ratio is about 0.12%, and the average active ETF expense ratio is about 0.39%, reflecting the additional resources required to actively manage the portfolio.

Benefits of Active ETFs

Active ETFs combine professional portfolio management with the flexibility and efficiency of the ETF structure. Depending on an investor's objectives, they can offer several potential advantages over other investment vehicles.

Portfolio Flexibility

Unlike passive ETFs, which are designed to track a benchmark, Active ETFs give portfolio managers the flexibility to adjust holdings as market conditions change. This can enable managers to reduce exposure to perceived risks, identify emerging opportunities, or position the portfolio differently as economic conditions evolve.

Professional Management

Active ETFs are managed by experienced investment professionals who research securities, construct portfolios, and make ongoing investment decisions based on evolving market conditions. This active approach enables managers to pursue opportunities, manage risk, and adapt the portfolio in support of the fund's investment objectives.

Transparency

Most Active ETFs disclose their portfolio holdings daily, giving investors greater visibility into the securities they own and how the investment strategy is being implemented. Combined with real-time market pricing, this transparency helps investors monitor their investments more effectively.

Trading Flexibility

Like all ETFs, Active ETFs trade throughout the day on an exchange, enabling investors to buy and sell shares at market prices whenever the market is open. Investors can also use a variety of order types, including limit and stop orders, providing greater flexibility than traditional mutual funds.

Tax Efficiency

Active ETFs may offer tax advantages over many traditional mutual funds because of the ETF creation and redemption process and opportunities for tax-loss harvesting.

Risks of Active ETFs

While Active ETFs offer several potential advantages, they also involve risks that investors should consider before investing.

Manager Risk

Unlike passive ETFs, whose performance is designed to track a benchmark, Active ETFs rely on portfolio managers to make investment decisions. As a result, a fund's performance depends in part on the manager's investment process, research, and security selection.

Performance Risk

There is no guarantee that an Active ETF will outperform its benchmark or comparable passive investment. Market conditions, investment decisions, and security selection can contribute to fund underperformance.

Higher Costs

Active ETFs generally have higher expense ratios than passive ETFs because they require ongoing research, portfolio management, and trading. Over time, these additional costs can reduce net investment returns.

Types of Active ETFs

Active ETFs span a wide range of investment categories, offering investors diverse options for portfolio construction:

Equity ETFs span the market spectrum from domestic large-cap to small and mid-cap stocks, international markets, and specific sectors.
Fixed income offerings include strategies focused on government, corporate, and municipal bonds, as well as high-yield opportunities.
Multi-asset ETFs provide balanced portfolios and risk-managed approaches.
Alternative strategy ETFs employ specialized techniques and strategies such as long/short strategies, real estate, commodities, volatility-based approaches, private equity, and many more.

This variety enables investors to access professional management across virtually any asset class or investment approach.

person in suit using a pen in front of a laptop

Choosing the Right Active ETF

Choosing an Active ETF involves more than comparing recent performance. Investors should evaluate whether a fund's investment strategy, risk profile, costs, and management approach align with their financial goals and investment objectives.

Key Considerations:

Investment Objectives: Determine whether the ETF's strategy aligns with your goals, such as long-term growth, income generation, or capital preservation.
Risk Tolerance: Consider whether the fund's investment approach and potential volatility align with your comfort level with risk.
Time Horizon: Your investment timeline should align with the ETF's strategy and expected holding period.
Costs: Evaluate the expense ratio and potential trading costs, and how they may impact long-term returns.
Liquidity: Consider the ETF's average trading volume, as higher-volume ETFs typically have tighter bid-ask spreads and lower trading costs.

Evaluation Criteria

Once you've identified an Active ETF that aligns with your investment objectives, compare similar funds to determine which best meets your needs. Consider the following evaluation criteria:

Investment Strategy: Understand the fund's investment approach, portfolio construction process, and stated objectives.
Management Team: Evaluate the experience, investment philosophy, and track record of the portfolio managers.
Historical Performance: Review the fund's performance over multiple market cycles and compare it with its benchmark and peers. While past performance does not guarantee future results, it can provide insight into how the strategy has performed under different market conditions.
Expense Ratio: Compare the fund's fees with those of similar Active ETFs, recognizing that costs can affect long-term returns.
Liquidity: Consider average trading volume and bid-ask spreads, particularly if you anticipate trading frequently or investing larger amounts.

How to Evaluate Active ETF Performance

Evaluating an Active ETF involves more than reviewing recent returns. Investors should consider a range of performance and risk measures to better understand how a fund has performed over time and whether that performance aligns with its investment objectives and benchmark.

Key Performance Measures

Total Return measures the ETF's overall gain or loss over a specific period, including changes in share price, reinvested dividends, interest payments, and other distributions, net of fund expenses.
Standard Deviation measures the variability of the ETF's returns over time and provides insight into the fund's historical volatility. Higher standard deviation generally indicates greater price fluctuations.
Alpha: measures the ETF's performance relative to its benchmark after adjusting for risk. Positive alpha suggests the portfolio manager has added value through active management.
The Sharpe Ratio evaluates risk-adjusted returns by comparing the ETF’s excess return to its volatility, indicating the efficiency in generating returns. A higher Sharpe Ratio generally indicates more efficient risk-adjusted performance.
The Information Ratio measures the consistency of an ETF's excess returns relative to its benchmark while accounting for tracking error. A higher Information Ratio suggests the manager has delivered more consistent outperformance.

two investors reviewing charts in front of a brightly lit window

Regulation and Oversight of Active ETFs

Active ETFs are regulated investment vehicles subject to oversight by the SEC. Like other registered investment companies, they must comply with regulations designed to promote transparency, protect investors, and support fair and orderly markets.

Portfolio Transparency: Most active ETFs disclose their portfolio holdings daily, providing investors with visibility into the fund's holdings. Certain semi-transparent ETFs may disclose holdings less frequently under SEC-approved frameworks.
Registration and Disclosure: Active ETFs are subject to disclosure requirements related to investment objectives, risks, fees, and performance, helping investors make informed decisions.
Rule 6c-11: As discussed above, SEC Rule 6c-11 established a consistent regulatory framework for most ETFs, streamlining the launch process and supporting continued growth in the ETF market.

Recent Developments

Recent SEC initiatives have modernized ETF reporting and valuation practices, providing investors with clearer disclosures and enhancing transparency across the ETF industry.

The Future of Active ETFs

Active ETFs have become an increasingly important part of the investment landscape as investors seek the flexibility of the ETF structure combined with professional portfolio management. Continued product innovation and growing investor adoption have expanded the range of actively managed strategies available across equity, fixed income, multi-asset, and alternative investments.

As the market continues to evolve, investors can expect greater choice and access to actively managed investment solutions. However, regardless of market trends, selecting an Active ETF should remain grounded in investment objectives, risk tolerance, time horizon, and a fund's long-term investment approach.

Active ETF Spotlight: Hilton Small-MidCap Opportunity ETF (SMCO)

The Hilton Small-MidCap Opportunity ETF (SMCO) exemplifies the advantages of active ETF management in the small and mid-cap equity space.

The fund seeks to identify small- and mid-cap companies whose market prices may not fully reflect their long-term earnings potential. Using Hilton's proprietary investment process, the portfolio management team actively researches, selects, and monitors investments across the value-growth spectrum.

The strategy takes an opportunistic, risk-adjusted approach to portfolio construction, including investing in companies of various sizes. This flexibility enables the portfolio managers to adapt as market conditions evolve while maintaining a disciplined investment process.

Through active security selection, disciplined portfolio construction, and ongoing risk management, SMCO illustrates how an active ETF can provide investors with professionally managed exposure to the small- and mid-cap equity market.

Conclusion

Active ETFs combine professional portfolio management with the flexibility, transparency, and tax efficiency of the ETF structure. By actively selecting securities and adapting portfolios as market conditions evolve, they can offer investors an alternative to traditional passive investing while maintaining many of the benefits that have made ETFs increasingly popular.

Like any investment, Active ETFs should be evaluated in the context of an investor's financial goals, risk tolerance, time horizon, and overall portfolio strategy. Understanding a fund's investment approach, management team, costs, and historical performance can help investors determine whether an Active ETF aligns with their long-term objectives.

For investors seeking actively managed exposure to the small- and mid-cap equity market, the Hilton Small-MidCap Opportunity ETF (SMCO) offers a disciplined investment approach backed by experienced portfolio managers and a proprietary research process.

To learn more about the Hilton Small-MidCap Opportunity ETF (SMCO) or Hilton's investment strategies, contact a Hilton representative today.

Before investing you should carefully consider the Fund’s investment objective, risk, charges, and expenses. This and other information is in the prospectus or summary prospectus. A prospectus or summary prospectus may be obtained by visiting www.hiltonetfs.com or calling 1-833-594-4586. Please read the prospectus or summary prospectus carefully before you invest.

Investing involves risk, including possible loss of principal.

Investors buy and sell ETF shares through a brokerage account or an investment advisor. Like ordinary stocks, brokerage commissions, and/or transaction costs or service fees may apply. Please consult your broker or financial advisor for their fee schedule.

There is no guarantee that the Fund’s investment strategy will be successful. The Fund is subject to the risk that the Sub-Adviser’s Small & Mid Cap Opportunities investment process (SMCO Process) may not achieve its objective of seeking risk-adjusted returns.

Investments in small and mid-capitalization companies involve unique risks. Small and mid-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large-capitalization companies.

Shares may trade at a premium or discount to their NAV in the secondary market, and the value of the Fund’s portfolio could decrease if the Sub-Adviser’s judgments about the attractiveness, value, or market trends of the stocks selected for the Fund prove incorrect. The Fund is new and has a limited operating history.

Distributor: Foreside Fund Services, LLC.

What is the difference between an Active ETF and a passive ETF?

Active ETFs are actively managed by portfolio managers, while passive ETFs use a rules-based approach designed to track a benchmark.

Are Active ETFs more expensive than passive ETFs?

Generally, yes. Active ETFs typically have higher expense ratios because they require professional management, research, and often more frequent trading.

Are Active ETFs tax efficient?

Like other ETFs, Active ETFs may be tax efficient because the creation and redemption process can help reduce taxable capital gains distributions. Individual outcomes vary.

Can Active ETFs outperform passive ETFs?

Active ETFs may outperform their benchmark, but there is no guarantee they will outperform passive ETFs or achieve their investment objectives.

Who should consider investing in an Active ETF?

Investors seeking professional portfolio management within a flexible, generally transparent ETF structure may find Active ETFs align with their investment needs and objectives.