Active ETFs in Canada: What are they and how do they fit into a portfolio?

When people hear the word active, they often picture a mutual fund. While active management has been around for decades, a newer development is the ability to get active management inside an ETF structure.

An active ETF can feel like a middle ground for many Canadian investors. You still get the trading flexibility and transparency typically associated with ETFs, while the day-to-day investment decisions inside the fund are handled by a professional management team.

Like all market-based investments, active ETFs can go up and down in value, and results depend on your strategy and the market environment.

What is an active ETF?

An active ETF is an exchange traded fund where a portfolio management team makes ongoing decisions about what to own, what to reduce and what to add. Instead of following an index rulebook, the team uses research and a defined investment process to build and maintain the portfolio.

It still trades on an exchange like other ETFs. You can buy or sell it through a brokerage account during market hours, just like you would with a stock or a passive ETF.

How is an active ETF different from a passive ETF?

Here’s where some investors can get confused. Both active and passive ETFs can hold a basket of securities and both trade on an exchange. The difference is how decisions are made inside the fund.

Passive ETFs follow an index:

• The goal is to track a benchmark or index as closely as possible.
• Holdings change mainly when the index changes.
• The manager role is often focused on implementation, such as trading efficiently and managing tracking differences.

Active ETFs are managed by a team following a defined process:

• The team decides what to buy, sell and hold based on the strategy.
• Weights can be adjusted as views or risks change.
• The portfolio is managed continuously rather than only when an index rebalances.

Do active ETFs handle rebalancing for you?

In many cases, yes. Active ETFs often handle rebalancing inside the fund. One reason many Canadian investors choose them is that day-to-day portfolio maintenance happens on their behalf. This can include adjusting position sizes, trimming exposures that have grown, adding to positions where the team has conviction and managing overall portfolio risk.

This may feel similar to what a professional advisor or portfolio manager might do in a discretionary account. The key difference is that an active ETF is not personalized advice. It’s one portfolio managed the same way for everyone who owns it.

Why do people look at active ETFs during volatile markets?

Volatility is often when investors notice the difference between following an index and having a manager making active decisions. When markets move quickly, a passive ETF continues to reflect the index, for better or worse.

An active ETF gives the management team the ability to respond within the boundaries of the strategy. That might mean reducing exposure to areas they see as higher risk, increasing exposure to areas they see as more resilient or adjusting the mix of holdings to reflect current conditions. While this represents a different decision-making approach, it doesn’t guarantee a better outcome.

What types of active ETFs exist in Canada?

Active ETFs are available across a growing set of categories. Details vary by provider and by fund, but many strategies fall into a few broad buckets.

Actively managed equity ETFs

These focus on stocks, often with a goal such as quality, value, growth, dividend focus or a specific region. Some strategies are more concentrated, while others hold a larger number of positions.

Actively managed fixed income ETFs

These focus on bonds and may adjust duration, credit exposure or sector mix. Bond prices can still decline, especially when interest rates rise, but active teams may have flexibility to reposition the portfolio.

Actively managed thematic and sector focused ETFs

Some active ETFs focus on themes that investors care about, such as artificial intelligence, robotics, sustainability or digital asset-related companies. These funds can be more volatile and more concentrated, so it’s important to understand what drives the theme and what risks come with it.

Where do active ETFs fit in a portfolio?

There’s no single right answer. Many investors think about active ETFs as one tool within a broader plan, rather than a full solution on their own.

Some investors use passive ETFs for broad market exposure and add an active ETF where they want a different approach, such as a specific sector, a style tilt or a portfolio team they trust. Others prefer a more active approach across multiple parts of their portfolio. Ultimately, the best structure is one you can stick with through market swings.

How should you think about costs for active ETFs?

Active ETFs often have higher fees than passive ETFs because they include ongoing research, portfolio construction, trading and risk oversight inside the fund. Fees vary by strategy and by provider.

One way to think about fees is to consider what you’re paying for. With a passive ETF, you’re paying for index exposure delivered efficiently. With an active ETF, you’re paying for a team to make decisions within a defined approach. This doesn’t replace personal financial planning, but it can reduce how much day-to-day portfolio work you feel you need to do on your own.

How are active ETFs different from active mutual funds?

Both can be actively managed, but the structure differs:

• ETFs trade during market hours and have a market ask price and bid price.
• Mutual funds typically process transactions at the end of the day using net asset value.
• ETFs are bought and sold through a brokerage account, while mutual funds are usually purchased through a fund account or dealer channel.

What should you look for when choosing an active ETF?

Active ETFs can look similar on the surface, so it helps to know what to check before you invest. A few fundamentals matter more than the product label.

Start with the strategy and the mandate

Make sure you understand what the fund is trying to do and what it’s allowed to hold. Two funds can both be called active equity ETFs and behave very differently.

Understand the team and the process

Active management depends on people and process. Look for clarity on how decisions are made, how risk is managed, and what the fund does when conditions change.

Check holdings and concentration

Holdings tell you what you actually own. Concentrated funds can move more sharply up or down. Broad funds may behave closer to the market.

Look at costs and trading characteristics

Fees matter, and so do trading spreads and liquidity. These can affect what you pay to enter or exit a position, especially during volatile markets.

Why do investors focus on experience and research in active ETFs?

With active management, the quality of the process matters. Investors often look for firms with long experience in active management, well-resourced research teams and a clear approach to portfolio construction and risk oversight.

At Fidelity we believe active management isn’t about making promises. Instead, the focus is on disciplined security selection, depth of research and consistent portfolio management through different market cycles.

How do you get started with active ETFs in Canada?

Getting started is usually easier when you decide the role first and the product second. This helps keep the focus on your plan, not short-term headlines.

1. Decide what you want the ETF to do in your portfolio, such as broad exposure, a specific theme or a different approach during volatility.
2. Choose a platform where you can buy ETFs, either with the support of an advisor or through a self-directed brokerage account.
3. Read the fund documents and understand the strategy, fees and key risks before investing.
4. Review periodically to confirm it still fits your goals and comfort with risk.

This information is general in nature and not intended as personal investment advice. ETFs can lose value, and it helps to consider your own situation before investing.