Cost pressures and regulatory shifts are among the factors that helped drive the ‘push to passive’ over the past decade. The result has been an explosion in investment products and solutions anchored around passive strategies, with ETFs to the fore.
Active ETFs – solving the alpha/cost dilemma
For many clients, however, the foregoing of outperformance potential remains an uneasy compromise. Yes, cost effectiveness is achieved, but with it comes the acceptance of sub index-like returns. For clients with those concerns, we view active ETFs as the solution to the ‘alpha/cost dilemma’.
Charges for active ETFs are only slightly greater than their passive counterparts and the transparency and liquidity advantages of the ETF wrapper are retained. The crucial point is that when the underlying investment strategy is effective, active ETFs can grant access to the active expertise many investors are keen to retain. At Columbia Threadneedle Investments, we are firm proponents of active management, and it is the hunger for alpha that lies at the heart of our active ETF ethos and philosophy.
Redefining quant for an active edge
Accusations of ‘passive plus’ or ‘shy active’ have been levelled at some ‘active ETFs’, while others have repurposed the ‘smart beta’ approach that has generally failed, due to its over simplified approach. In contrast, an active mindset is applied right through the process behind our QR Series Equity Active ETFs.
First, a tried and tested quantitative ranking model is applied to the benchmark index – whether that’s a global or a region-specific universe. At this stage, stocks are ranked relative to their industry peers with a model anchored around three themes – quality, value and catalyst. Crucially, we recognise that return drivers vary between industries, so the model is customised to reflect those nuances. For example, the US financials sector contains a wide range of business types. Does it really make sense to apply the same criteria to lending institutions, insurance providers and financial intermediaries? We don’t think so. This customisation within industries is designed to make our assessment of businesses more effective.
We then ally this quantitative ranking with input from our fundamental research team. The aim is to narrow down cohorts and build portfolio exposures to those businesses with greater potential while avoiding those where analysis indicates significant downside risk. We believe this multi-layered and customised approach redefines quant-based investing and hardwires active positions into our active ETF lineup.
Conviction investing drives composition
By being firm in our active stance, we look to take meaningful weights relative to the benchmarks. Stock selection is a key element of our ‘value add’, so portfolios reflect a greater emphasis on names with positive prospects and the avoidance of businesses where our assessment of their potential is negative – even when they are large index constituents.
To see this stock selection in action you need look no further than the top 10 over- and underweight holdings of our CT QR Series US Equity Active ETF (QRUS) (Figure 1). Insight generated through fundamental research helps drive these truly active differences, with index top 10 businesses not invested in including Amazon.com and Tesla where our analysis raised valuation and quality concerns.
Figure 1:
Truly active – meaningful stances versus the Russell 1000 benchmark
Top 10 underweights | Portfolio | Index | Difference |
|---|---|---|---|
Apple | 9.53 | 6.42 | 3.11 |
JP Morgan Chase & Co | 3.88 | 1.37 | 2.51 |
Visa | 2.85 | 0.9 | 1.95 |
NVIDIA | 8.65 | 6.99 | 1.66 |
Booking Holdings | 1.43 | 0.26 | 1.17 |
TJX Companies | 1.43 | 0.27 | 1.16 |
Lowe’s Companies | 1.23 | 0.2 | 1.03 |
Uber Technologies | 1.2 | 0.3 | 0.9 |
Cisco Systems | 1.39 | 0.51 | 0.88 |
ExxonMobil | 1.72 | 0.85 | 0.87 |
Top 10 underweights | Portfolio | Index | Difference |
|---|---|---|---|
Microsoft | 0 | 6.03 | 6.03 |
Amazon.com | 0 | 3.52 | 3.52 |
Broadcom | 0 | 2.59 | 2.59 |
Tesla | 0 | 1.86 | 1.86 |
Berkshire Hathaway | 0 | 1.53 | 1.53 |
Eli Lilly and Company | 0 | 1.36 | 1.36 |
Netflix | 0 | 0.8 | 0.8 |
Johnson & Johnson | 0 | 0.79 | 0.79 |
Walmart | 0 | 0.73 | 0.73 |
Mastercard | 0 | 0.71 | 0.71 |
Source: Columbia Threadneedle Investments, 18 November 2025. For illustrative purposes only. The mention of any stocks or securities is not a recommendation to deal.
The aim is to incrementally generate outperformance through stock positions, while being mindful of the need to maintain broader balance. This ethos sits well with the likely role of QR Series Equity Active ETFs as core holdings in a portfolio. As such, a beta-aware approach aims to produce minimal deviation from the benchmark on country and sector weights, while broad style neutrality is ensured through the application of the customised industry-specific models.
The bottom line
Active ETFs are a compelling evolution in portfolio construction, combining cost-efficiency with the performance potential of active management. For investors seeking more than just index-like returns, they offer a practical way to embed alpha into core holdings. But not all active ETFs are created equal. The real differentiator lies in how ‘actively’ the strategy is applied. At Columbia Threadneedle Investments, our QR Series Equity Active ETFs are built on conviction, customisation and a genuinely active process – not simply passive mimicry. For investors unwilling to compromise on potential for outperformance, this is active investing redefined.
