Last wave of traditional managers embraces the active ETF model

As active ETFs grow beyond niche status, some of the last traditionally active managers, including Columbia Threadneedle and M&G, are entering the European market with strategies that blend research conviction and daily oversight.

Active ETFs have grown quickly, but for long have remained a divisive concept. These products seek to blend the low-cost structure and tradability of ETFs with the active management of mutual funds. For some investors, however, the term still raises concerns. Unlike index-tracking ETFs, active versions still rely on portfolio manager discretion, offer less transparency, and may diverge from benchmark performance.

A recent Morningstar report nevertheless shows the category is evolving. Active ETF assets have more than doubled since 2022, reaching nearly 700 billion dollars globally by mid-2025. In Europe, the market has also doubled over the past two years, though it still accounts for less than three percent of total ETF assets on the continent. 

“This is not closet indexing. We are not looking to deliver an index-like or enhanced index return. This is where the conviction comes in.”

Chris Lo, Columbia Threadneedle

Adoption in Europe remains more modest than in the United States, but is steadily rising. Notably, active ETFs are increasingly used in fund-of-funds portfolios, indicating traction with professional allocators. Funds with moderate tracking error and proven strategies are gaining traction, especially with institutional investors.

Quant redefined

Against this backdrop, Columbia Threadneedle is close to launching four equity ETFs under its Quant Redefined (QR) Series label. Already live in the U.S., the strategy applies a quantitative stock selection framework across U.S., European, global and emerging market portfolios.

“This is not closet indexing,” said Chris Lo, who manages nearly 18 billion dollars across 13 U.S. funds and will lead the European rollout, when speaking with Investment Officer. “We are not looking to deliver an index-like or enhanced index return. This is where the conviction comes in.”

Columbia Threadneedle is not alone. M&G, another legacy active manager, plans to launch active ETFs this year with strategies in gilts and Treasuries.

“Given many clients already use and have familiarity with ETFs, we see a natural evolution toward active solutions, which will provide new opportunities to engage with capital allocators and their advisors across the UK, Europe and Asia,” Neil Godfrey, global head of client group at M&G, told Investment Officer.

Second-generation approach

Columbia Threadneedle’s QR Series will launch under Ireland’s Ucits framework, pending final regulatory approval. Christine Cantrell, head of active ETFs in EMEA, calls it a second-generation offering.

“A number of years ago now, active ETFs were launched by some incumbents who have dominated market share. They constrain their tracking error relative to the benchmark,” she said. “However, now there is the demand to see something different; to be able to generate alpha and risk adjusted returns, that are more akin to active management.”

The QR Series targets a tracking error between 2 and 4 percent. In comparison, passive ETFs typically have near-zero tracking error. This signals that the manager is selecting stocks actively, but within defined parameters.

Tracking error welcome

Morningstar’s latest analysis confirms that the most successful active ETFs share three traits: lower fees than traditional funds, clear methodology and consistent process. “Tracking error in the 2 to 4 percent range, backed by live strategies and transparent process, is where institutional demand is strongest,” the report noted. These findings align with the firm’s positioning.

“Tracking error is just another word to say risk relative to the benchmark,” Cantrell added. “And with our strategy, the risk is warranted because it’s delivering better risk adjusted returns.”

Quant meets fundamental

The firm’s approach blends quant modeling with fundamental oversight. Stocks are ranked using quality, catalyst and value factors, with input from the global analyst network. Securities rated “strong buy” or “buy” are included, while “strong sell” names are excluded, even if ranked highly by the model.

“All of our securities in the selection universe are rated and ranked. And we would select only the top ranked based on our quantitative research. So, the top ranked stocks that are considered strong buys or buys are included in the portfolio,” Lo explained.

“If our research states it is a strong sell or sell, we’ll exclude it,” he added. “Whilst some managers may include the top weighted name of the index in their portfolio, even though the research says it’s a strong sell, we’re not shy to exclude it.”

Each ETF will hold about one-third of the index constituents. Market-cap weighting and sector allocations remain close to benchmark to avoid unintended bets.

Daily monitoring

Unlike many active ETFs that rebalance quarterly, the QR Series portfolios are monitored daily.

“We monitor the portfolio daily because we are active,” said Lo. “If we see a deep downgrade in ratings, we’re not going to wait until the next rebalance. We would actively remove that position.”

Lo added that many so-called active ETFs are “very dormant”. His team responds to research updates in real time. “We do not wait until the next reconstitution date.”

Professional focus

The QR Series is aimed at professional allocators, including wealth managers, family offices and institutional investors. “But also we are speaking to some pension funds and foundations, which may operate differently. It really depends on the region,” said Cantrell.

Columbia Threadneedle plans to distribute the ETFs across sixteen European countries. According to people familiar with the strategy, the firm is targeting fund sizes above one billion euros per strategy, a scale it has already managed in the U.S. The firm may also expand the range to include fixed income active ETFs.

“We are committing to the ETF space very significantly,” Cantrell said. “We have strong ambitions, with our global leaders tasking the business to succeed and take market share.”

The QR Series will be domiciled in Ireland, a choice driven by tax advantages. “There is currently a tax advantage for U.S. equities if you have an Irish domicile over, say, a Luxembourg domicile,” said Cantrell, referring to the dividend tax treaty between the U.S. and Ireland. That treaty taxes US-paid dividends at 15 percent, instead of 30 percent elsewhere in Europe.