ETFs, in plain English 

Exchange‑traded funds (ETFs) have become a core building block in UK portfolios, yet many clients still find them confusing – especially when it comes to active ETFs. This guide breaks down how ETFs work, the different types available and where they can fit into client portfolios.

This is a marketing communication. 

What is an ETF?

An exchange‑traded fund is a pooled investment that holds a basket of securities and trades on a stock exchange throughout the day, much like an individual share.

Investors can buy and sell ETF units via their chosen platform or broker. Behind the scenes, authorised participants and market makers create or redeem units to help keep the ETF’s price close to the value of its underlying holdings.​

Key points:

• You can see intraday prices and trade during market hours, subject to liquidity and spreads.
• Holdings are typically disclosed daily or regularly, providing transparency on what the fund owns.
• Costs are expressed as an ongoing charge, alongside trading costs such as bid-offer spreads.​

Index, active and everything in between

Early ETFs mostly tracked market indices. Today, the market includes a wide spectrum of strategies, ranging from pure index trackers to fully active strategies.

Active ETFs use portfolio managers and research teams to decide what the fund holds, aiming to outperform a benchmark or achieve a specific investment objective.

• Index ETFs seek to replicate an index as closely as possible, with limited manager discretion and low tracking error.
• Smart beta/factor ETFs follow rules‑based strategies that tilt towards factors such as value, quality or low volatility.​​
• Active ETFs apply human judgement, research and portfolio construction within an ETF wrapper, often with more flexibility and clearly defined investment objectives.

Call‑out box:
Our Active360 ETFs use a tilt‑based approach. They begin with broad indices, then systematically adjust weights towards companies with stronger climate and governance characteristics. The result is a portfolio that stays close to benchmark risk and return while gradually improving its ESG profile.

How ETFs trade and why liquidity matters

ETF investors benefit from a layered liquidity model. Units can be traded on an exchange, while underlying baskets are created or redeemed in larger blocks by authorised participants.

This structure means an ETF’s ability to handle flows depends on both the liquidity of its underlying holdings and the depth of trading of the ETF in the secondary market.

Key points (institutional):

• Check average daily volume and bid-offer spreads when planning larger trades.
• For less liquid asset classes, work with platforms and execution desks to manage trading, particularly during volatile periods.
• Use limit orders where appropriate to control execution prices.​

Benefits and risks of ETFs

For many investors, ETFs can provide a simple way to access diversified market exposures, often at lower costs than traditional funds, with the added flexibility of intraday trading.

However, ETFs are still exposed to market risk, while leverage, derivatives or highly concentrated portfolios may bring additional complexity.​

Benefits:

• Diversified exposure through a single trade.
• Typically, fees are competitive compared with actively managed mutual funds.
• Transparency of holdings and pricing.

Risks:

• Market risk – the value of investments can fall as well as rise.
• Tracking error – performance may differ from any stated benchmark.
• Liquidity risk – spreads may widen, especially in stressed markets or niche exposures.
• Other risks – currency, credit or derivative exposures may bring additional risk depending on the strategy.

Where our Active ETFs fit

Our Active360 Tilt ETFs are designed for investors who want benchmark‑aware equity exposure with improved climate and governance characteristics, delivered via a transparent ETF structure.

In our view, they can complement existing mutual funds, mandates and index ETFs by offering a climate‑aware core or satellite allocation that can be implemented easily on platforms.

Key points:

• Built on established Equity Tilt strategies.
• Clear documentation on objectives, tilting methodology, climate metrics and risk controls.
• Designed to sit within centralised investment propositions, model portfolios and advisory models, supporting governance requirements.​

Next steps for advisers

To deepen your understanding of active ETFs and how they can support specific client segments, explore our Active360 Academy, which offers structured educational material and case studies to help deepen your understanding. You can also visit our Active ETF Fund Centre for fund‑level information, documentation and implementation guidance.  

Important Information

This is a marketing communication and is not investment advice. For information purposes only. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change.

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Issued in June 2026 by Royal London Asset Management Limited, 80 Fenchurch Street, London, EC3M 4BY.

Authorised and regulated by the Financial Conduct Authority, firm reference number 141665.

A subsidiary of The Royal London Mutual Insurance Society Limited.

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