Active vs Passive ETFs: What Is the Difference?

By Adam Patti, Chief Executive Officer, VistaShares | Published November 13, 2026

A passive ETF aims to track the performance of an index by holding the securities in that index, or a representative sample, according to published rules. An active ETF is managed by a portfolio manager or team who decide what to buy and sell based on research, judgment or a proprietary process, with the goal of meeting a stated objective. Both use the same ETF structure, trade on exchanges and offer daily liquidity, but they differ in how holdings are chosen, what they cost and what investors should evaluate.

How does a passive ETF work?

A passive ETF follows an index created by an index provider. The index methodology defines which securities qualify, how they are weighted and when the index rebalances. The fund’s job is to replicate that index as closely as possible, minimizing the difference between its return and the index’s return, known as tracking difference.

Indexes vary widely. Some, like broad market indexes, weight companies by market capitalization. Others apply rules based on factors such as dividends, volatility or quality, or define themes and sectors. Even a rules-based index reflects choices made by its designer, so passive does not mean neutral. It means the fund follows the rules rather than making discretionary decisions.

How does an active ETF work?

An active ETF is run by a portfolio manager or team that makes ongoing decisions about holdings. The manager may pick individual securities, adjust sector or country weights, manage interest rate or credit exposure, or apply an options strategy. The fund’s objective and strategy are described in its prospectus, and many active ETFs compare their results to a benchmark index, though some pursue outcomes, such as income or reduced volatility, rather than trying to beat an index.

Active ETFs cover a broad range of approaches, including fundamental stock selection, quantitative models, fixed income management, options-based income, thematic investing and multi-asset allocation.

How fast are active ETFs growing?

Active ETFs have grown rapidly since the Securities and Exchange Commission adopted Rule 6c-11 in 2019, which made it easier for active managers to use the ETF structure.¹ Actively managed ETFs accounted for 12.5% of U.S. ETF assets at the end of June 2026, with passive funds holding 87.5%, according to Morningstar data reported by InvestmentNews.² Globally, active ETF assets reached a record $2.59 trillion at the end of July 2026, according to ETFGI.³ Asset growth reflects investor demand, not fund results.

How do costs compare?

Passive ETFs that track broad indexes are often among the lowest-cost investments available, because index replication requires less research and trading. Active ETFs generally charge higher expense ratios to cover research, portfolio management and, in some cases, more frequent trading. Specialized passive funds, such as those tracking thematic or strategy indexes, can also cost more than broad index funds.

Investors should weigh costs against what each fund is designed to do. A higher expense ratio reduces returns every year, so the question is whether the fund’s approach offers something the investor values that a lower-cost alternative does not.

How does transparency differ?

Most passive ETFs and most active ETFs disclose their full holdings every business day, as required for funds relying on Rule 6c-11.¹ Some active ETFs use a semi-transparent structure approved by the SEC, which allows them to disclose holdings less frequently while using other methods to support efficient trading. Investors can check a fund’s website to see how and when it discloses holdings.

How do taxes compare?

Both active and passive ETFs can use in-kind creation and redemption, which often helps limit capital gain distributions. Active ETFs that trade more frequently, or that use strategies such as options, may realize more gains than passive funds tracking a stable index. Results vary by fund. Our article on what an ETF is and how it works explains creation and redemption.

What are the advantages of each approach?

Passive ETFs offer predictability, because holdings follow published rules; typically low costs; and returns that closely match a defined market segment. They do not attempt to avoid declines in the index they track.

Active ETFs offer flexibility, because managers can respond to changing conditions, avoid securities they consider unattractive, manage risk or pursue specific outcomes such as income. They depend on the skill and process of the manager, and results can differ meaningfully from a benchmark in either direction.

Many investors use both: passive funds for core market exposure and active funds for specific goals, such as income, risk management or targeted themes.

How should investors evaluate a passive ETF?

Index methodology. What does the index include, how is it weighted and how often does it rebalance?

Tracking difference. How closely has the fund matched its index after fees?

Costs. What are the expense ratio and trading costs?

Liquidity. How wide is the bid-ask spread? Our article on ETF bid-ask spreads explains trading costs.

How should investors evaluate an active ETF?

Objective and process. What is the fund trying to achieve, and how does the manager make decisions?

Team and experience. Who manages the fund, and how long have they followed this approach?

Consistency. Has the fund behaved in line with its stated strategy across different market conditions?

Costs. Is the expense ratio reasonable for what the strategy does?

Results. How has the fund performed relative to its objective and an appropriate benchmark over full market cycles? Past performance does not guarantee future results.

Our articles on how to compare covered call ETFs and how to evaluate a thematic ETF apply these questions to specific types of funds. More introductory topics are covered in our ETF basics guide. Investments involve risk, including possible loss of principal.

Frequently asked questions

Is an index ETF always passive?

Generally, yes. An index ETF follows a published methodology rather than a manager’s discretion. However, indexes themselves reflect design choices, such as which companies qualify and how they are weighted, so a rules-based fund can still take a distinctive approach compared with a broad market index.

Why do active ETFs cost more?

Active ETFs pay for research, portfolio management and often more frequent trading. Those costs are reflected in higher expense ratios than broad index funds. Whether the cost is worthwhile depends on what the fund aims to deliver and how well it does so relative to lower-cost alternatives.

Do active ETFs disclose their holdings?

Most do, every business day, under the SEC’s ETF rule. Some active ETFs use a semi-transparent structure that discloses holdings less often, using other methods to support efficient trading in the fund’s shares. A fund’s website explains its disclosure practice and timing.

What is tracking difference?

Tracking difference is the gap between a passive ETF’s return and the return of the index it tracks over a period. It reflects fees, trading costs and how the fund replicates the index. Smaller tracking difference indicates that the fund has followed its index more closely.

Can I hold both active and passive ETFs?

Yes. Many investors use passive ETFs for broad market exposure and active ETFs for specific goals, such as income, risk management or targeted themes. Combining them requires attention to overlap between holdings, total costs and how each fund fits the overall plan.

Cite this page: Adam Patti, "Active vs Passive ETFs: What Is the Difference?," VistaShares, updated November 13, 2026, https://www.vistashares.com/active-vs-passive-etfs/. Plain-text version.

This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. ETF shares are bought and sold at market price, which may differ from net asset value, and brokerage commissions and other trading costs may apply.