Operational set-up and other considerations for Active ETFs

Actively managed ETFs in Europe recorded significant growth over the last year, rising from EUR 55.5 billion assets under management to EUR 62.4 billion end August 2025.¹   This growth follows the ETF surge in Europe, for example, crossing the EUR 500 billion threshold in Germany, the largest ETF market of the continent.²  In this context, the active segment of the ETF market also doubled in the past two years but can still be considered a niche area compared to the sheer size of ETF assets actively managed in the US (nearly USD 1.5 trillion).  

Actively managed ETFs became a compelling alternative over time because they blend active management with diversification through index tracking, low-cost nature of passive strategies, liquid tradability and various tax efficiencies. Building on this fundament, active managers seek alpha through fundamental research, portfolio weighting, and selective portfolio intervention depending on the tactical conditions.

We have seen significant retail adoption in Europe, driven by neo-brokers, fintech platforms, and saving plans, especially among young investors seeking to get low-cost exposure to the overall market. We expect this trend to extend into 2026, with new fund launches in the pipeline. This is also in line with significant interest from sponsors expressed through various media as this can be a source of new income in the wake of continued market rotation from traditional mutual funds to ETFs. This is a welcome development because active ETFs can offer a compelling value proposition for investors who wish to combine diversification with targeted market bets.

However, the active advantage is not a given. It requires an intricate operational set-up with several moving parts and a dedicated team of service providers.  The following operational issues need to be carefully weighed especially by the fund managers in Luxembourg looking to move into the active ETF space. 

1. Capital Markets & Liquidity Readiness: Launching an active ETF in Luxembourg requires the running of two tightly linked operating systems:

• Traditional fund management (think about portfolio management, legal and risk limits, NAV, depositary oversight)
• Real-time ETF microstructure that creates ETF shares and maintains price and NAV alignment (think about authorized participants (AP), market makers (MM), trading venue connectivity, regular portfolio transparency, primary market activity, secondary market activity round the clock)

ESMA’s own definition of UCITS ETF calls for the existence of intraday trading with at least one market maker acting to keep the exchange price close to NAV, which makes capital market readiness a regulatory and commercial necessity, not an optional add-on.

2. Portfolio transparency versus intellectual property: Execution can be 80% of the investment thesis. This is particularly important for active strategies as APs and MMs need sufficiently frequent holdings and basket information to hedge risk and run arbitrage efficiently, whereas the manager may want to avoid publishing trades which enable front‑running or strategy replication. This transparency decision also affects spreads, liquidity, and performance. The CSSF FAQ on 2010 Law picks this up and explicitly states that MMs and APs need frequent information on portfolio holdings to ensure an efficient arbitrage mechanism and an active secondary market for ETFs.³  In addition, IFMs must publish detailed holdings to investors, but may do so at lower frequency than the information provided to MMs/APs to protect proprietary information. That requires two disclosure streams, a secure, simultaneous Portfolio Composition File (PCF) which will serve as a portfolio channel to APs/MMs with confidentiality controls, and a public holdings publication process that comes with a justified and document frequency lag. A failure to implement both streams can result in poor liquidity (hence wider spreads) or loss of active advantage.  

This is a meaningful differentiator versus fund domiciles that require daily public holdings. The ALFI ETF Brochure, published in November 2025, lays out practical options that are available to fund sponsors (e.g., new SICAV, new compartment, ETF share class, conversion) and highlights that all options require ETF specific elements such as exchange listing, portfolio transparency, and engagement with APs/MMs.⁴  This clearly indicates that operational excellence remains imperative. The Luxembourg Stock Exchange promotes fund listings (including ETFs) and emphasizes speed and time-to‑market for Luxembourg domiciled regulated funds and visibility and transparency benefits of such listing. 

3. Primary market operations (i.e., creation and redemption): ETF shares are created when an AP delivers a daily basket (or cash) in exchange for a creation unit (redeemed through the reverse). This requires precise daily files, cutoffs, settlement coordination, and transaction fee policies. This hectic workflow requires each part to work in the same rhythm and bears the risk of breaking under stress. While many active ETFs prefer in-kind transactions for efficiency, operational realities sometimes can force cash creations/redemptions. The fund administrator/custodian must support both scenarios including an established failure management and reconciliation process. 

In this context, APs need legal agreements, connectivity to basket dissemination, settlement accounts, and clarity on who pays what in terms of fees. Operationally, the playbooks need to be established for partial fills, failed settlements, rebalances, corporate actions, or significant market moves.

4. Secondary market liquidity: ESMA’s UCITS ETF definition requires the role of a market maker helping to ensure the exchange value does not significantly vary from the NAV. This makes liquidity support essential. The ALFI ETF Brochure emphasizes that a capital markets team can act as a hub coordinating various parties. For a smooth operation, this team should manage daily operational integration and monitor spreads, volumes, and NAV deviations across venues. Without sufficient reliable quoting, spreads can widen, volumes can stay low, and as a result trading platforms might deprioritize the product, which can become a self‑reinforcing protocol for failure. Many active managers underestimate this “ETF team” requirement.

5. Distribution: Even if an ETF is exchange-listed, managers may still need to comply with cross-border marketing notification requirements under the UCITS Directive and local regulatory frameworks when marketing in other countries across the globe. In practice distribution is a combination of legal permissions, platform onboarding, and market quality (i.e., spreads or assets managed).  

ESMA’s product governance guidelines require manufacturers and distributors to define target markets and distribution strategies and to review products over their lifecycle.⁵ This can have an important impact on how platforms approve and position an ETF and which investor segments it reaches. 

As active ETFs must provide investors with a KID (Key Investor Document), which requires cost disclosures, performance scenarios and regular updates, active ETFs must have robust internal processes for creating and updating accurately their KIDs in full alignment with the fund administration and accounting teams, while carefully handling any share class nuances that may exist. Also, the prospectus drafting should not be deemed a box ticking exercise as it reflects the operating model. If the operating model is not already designed with providers and AP/MM input, approvals and later execution bear the risk of drift and failure. 

Many professional ETF buyers (e.g., advisors, platforms, discretionary managers) use operational and liquidity screens (spread history, quote quality, tracking premium‑discount behavior). Because the ETF concept is tied to market making and NAV alignment, poor market quality can become a distribution barrier, going beyond merely a trading issue. 

6. Service Providers: A Luxembourg based active ETF should consider the following service providers:

• ManCo/UCITS management company (if not self-managed), portfolio manager/investment advisor
• Depositary and custodian network that needs to support in-kind transfers and the operational model to accept/deliver baskets with tight cutoff times
• UCI administrator / fund administrator (NAV, reporting, shareholder servicing support), who needs to support multiple cutoffs and corporate action handling to support both cash and in-kind activity and reconcile market flows (shares outstanding vs. TA/registrar, cash vs. securities delivered, AP balances) 
• Transfer agent/registrar (critical for primary market recordkeeping)
• Capital markets/ETF operations desk (in house or outsourced) coordinating APs/MMs, baskets, market quality
• APs and MMs that support all assets and geographies, and who are able to quote across intended venues/currencies and manage hedging when holdings are less frequently traded
• Listing agent and exchange/venue coordination: need to record ETF listings and ongoing obligations, venue connectivity and support corporate actions
• Data dissemination vendors (PCF/basket, holdings publication)
• Legal counsel, auditor, tax advisors

Going forward, we expect to see active ETF acceleration in Europe. Both Amundi and BNP Paribas have leaned into active ETF strategies recently, with new products launched and several multifactor ETF strategies being prioritized.⁶ Differentiation will be key in this overcrowded ETF landscape with competition intensifying between traditional issuers and new entrants.