At their conception, ETFs only tracked indexes, but today there is also demand for actively-managed ETFs.
ETFs tend to look a lot like passive index mutual funds, except that they can trade intra-day like stocks, while mutual funds only settle within 24 hours. In the last decade or so, there has been an increasing market for actively-managed ETFs as well.
It is somewhat ironic that the popularity of actively-managed mutual funds has decreased while an abundance of actively-managed ETFs has appeared. The popularity of ETFs has grown enough for fund managers to attempt more and more things.
A passively-managed ETF will have lower expenses and will use algorithms to track indexes or follow specific index-oriented strategies. Actively-managed ETFs employ a larger staff of analysts and fund managers who seek to generate “alpha,” or returns over and above a benchmark.
Passive funds only seek to replicate the benchmark. With greater anticipated returns come greater management fees and expenses, however, and some ETFs now charge as much or more than actively managed mutual funds.
What is Index Investing?
What is Active Trading?
What is the Difference Between Active and Passive Money Management?