What Is an Active ETF? How It Differs From a Passive ETF

"A Manager Picks the Stocks, But It's Still Called an ETF" — Isn't That a Contradiction?

ETFs carry a strong reputation as products that simply replicate an index. As covered in What Is an ETF?, the basic design of an ETF is to copy an index like the KOSPI 200 or the S&P 500 — same constituent stocks, same weights — and let investors trade it on an exchange throughout the day. Yet over the past few years, brokerage reports and financial headlines have increasingly featured something called an "active ETF." A manager adjusts holdings and weights at their own discretion based on market conditions, and the product still trades in real time on an exchange just like any other ETF. If copying an index verbatim is supposed to be the whole point of an ETF, how can something driven by a manager's judgment still earn the same label? The answer is that an active ETF borrows the trading mechanics of a passive ETF while layering in a deliberately constrained amount of manager discretion. This lesson walks through exactly what rule lets "active" and "ETF" coexist, and why that rule has recently become a genuine source of controversy.

Where Active ETFs Sit Between Passive ETFs and Traditional Active Funds

Lining up three products side by side makes the active ETF's position clear. A passive ETF simply replicates its underlying index, leaving almost no room for a manager's own stock-picking, which is exactly why its management fee runs so low. At the other end sits a traditional actively managed mutual fund, the kind sold through a bank or brokerage counter: a manager has full discretion over which stocks to hold, the fund doesn't trade on an exchange, investors can only buy or sell at a single net asset value calculated once a day, and fees run noticeably higher. An active ETF sits in between. Like a traditional active fund, the manager selects securities aiming to beat the benchmark. But like a passive ETF, it trades on an exchange in real time and relies on the same creation/redemption mechanism that keeps its market price anchored close to net asset value. In short, an active ETF is built to combine a manager's stock-picking discretion with an ETF's trading convenience.

The Core Mechanism: A 0.7 Correlation Requirement With the Benchmark Index

The hard question is how much discretion to actually grant the manager. Hand over unlimited discretion and the product effectively becomes "a traditional active fund that happens to trade on an exchange" — losing the transparency and predictability that the ETF label is supposed to guarantee. Korea's rules address this by requiring active ETFs to maintain a correlation coefficient of at least 0.7 with their comparison index. The correlation coefficient is a statistic, ranging from -1 (moving in exactly the opposite direction) to 1 (moving in perfect lockstep), that measures how closely the ETF's returns track the comparison index's returns. A reading close to 1 means the ETF and the index move almost identically; 0.7 still represents a fairly high degree of co-movement.

Industry commentary often simplifies this by describing active ETFs as "tracking the index for 70% and managing freely within the remaining 30%," but that's not a precise description. A correlation coefficient of 0.7 is a statistical measure of how similarly the return patterns move — it doesn't literally cap any specific percentage of holdings that must mirror the index. In practice, though, loading up on names that diverge sharply from the benchmark, or tilting weights aggressively, tends to push the correlation below 0.7, which is why the "30% free rein" shorthand has become a widely used, if loose, way of describing the felt range of a manager's discretion. And because falling below 0.7 for three consecutive months triggers mandatory delisting, managers have to keep this number in the back of their minds even while picking stocks freely.

A simplified example helps make this concrete. Suppose an active ETF holds a basket of large-cap stocks at weights close to the benchmark, swapping out just a handful of names based on the manager's judgment. If the two return series move in similar directions and magnitudes on most days, the correlation stays close to 1. But if the manager instead loads up heavily on a theme barely represented in the benchmark — say, batteries or biotech — while holding only a token weight in the index's actual constituents, then every time markets swing sharply, the ETF and the index can move by very different amounts, sometimes in different directions entirely, and the correlation can slip below 0.7. The more aggressively "active" the manager gets, the paradoxically harder this number becomes to defend.

Why the Price Stays Close to NAV: What Daily Disclosure Buys

A passive ETF's market price stays close to net asset value because authorized participants (APs) constantly arbitrage away any gap. For that arbitrage to work, the AP needs to know exactly which securities, and how much of each, the ETF currently holds. So in exchange for letting managers pick stocks, Korea requires active ETFs to disclose their full portfolio deposit file (PDF) every single day. That's why Korean active ETFs are internationally classified as "transparent" active ETFs.

That stands in sharp contrast to some U.S. active ETF structures. In the U.S., the SEC approved a "semi-transparent" structure called ActiveShares back in 2019. Under that design, holdings aren't disclosed daily — only quarterly — and a "confidential account" standing between the AP and the fund manager handles the arbitrage instead, while investors get a per-second estimated value to keep the price roughly in line. The point is to stop competitors or other investors from simply copying a manager's carefully researched picks every single day. Korea took the opposite path, prioritizing full daily transparency, which boosts confidence in the arbitrage mechanism but leaves managers carrying the burden of exposing their best ideas in public every day. That tension is exactly why industry voices sometimes grumble that these products are "active in name only."

Growth in Numbers, and a Paradoxical Delisting Case

Korea's active ETF market launched in June 2017, when four asset managers simultaneously listed six bond-type active ETFs, ending that year with a combined AUM of just ₩1.33 trillion. Growth accelerated sharply once equity active ETFs were allowed to list. Reports put total active ETF assets at roughly ₩32 trillion in 2023, ₩54 trillion in 2024, and ₩91 trillion in 2025, crossing ₩100 trillion by April 2026. Looking at equity active ETFs alone, monthly net inflows reportedly averaged around ₩59.5 billion between 2021 and 2024, then jumped to roughly ₩526.9 billion a month in 2025 — a sign that investors are piling in fast, chasing returns that beat the index.

But that same growth surfaced a glaring inconsistency in the rules in 2026. Four active ETFs run by Korea Investment Trust Management were delisted after their correlation with the comparison index fell below 0.7 for three consecutive months. What made this controversial was the reason the funds breached the threshold: not weak performance, but the opposite — they had meaningfully outperformed their benchmark. The better a manager's stock-picking beats the index, the more the two return curves naturally diverge in shape, which can push the statistical correlation down. In other words, these funds were delisted because of their strong performance. The episode exposed a real limitation in the current framework: the correlation rule isn't actually protecting investors from poor performance — it's mechanically policing statistical resemblance to a benchmark, regardless of whether the divergence comes from skill or from failure.

What Comes Next: The Push for a "Fully Active ETF"

Against that backdrop, reports say Korea's Financial Services Commission has begun drafting legislation to introduce an "active ETF with no index-construction requirement" — often called a fully active ETF — which would scrap the correlation obligation entirely. The idea is to let managers compete purely on stock-picking skill without worrying about a benchmark-tracking number at all. As of this writing in October 2026, though, that reform has not yet been finalized, and reports describe the discussion as having stalled for nearly six months. Exactly when, and under what specific conditions, a fully active ETF might launch will depend on future announcements from the FSC and the Korea Exchange. For now, the 0.7 correlation rule and the daily PDF disclosure requirement remain the operative rules.

What to Check Before Investing in an Active ETF

A few things deserve extra scrutiny compared with a passive ETF. First, fees: because an active ETF's manager is doing genuine research and stock selection, its expense ratio typically runs higher than a passive ETF in the same asset class, so it's worth checking whether the fund's track record relative to its benchmark actually justifies that extra cost. Second, philosophy and personnel: since an active ETF's performance ultimately comes down to a person (or a strategy that person designed), understanding how the manager selects stocks — and whether there have been changes in who runs the fund — matters far more than it would for a passive ETF. Third, don't assume the word "active" means unlimited discretion; as long as the 0.7 correlation rule remains in force, these funds can't hold assets that diverge completely from their benchmark. Fourth, watch delisting risk: as the Korea Investment Trust Management case shows, a fund can be delisted over a statistical correlation breach even while delivering strong performance, so it's worth paying attention to any disclosure or news suggesting a holding is drifting close to that threshold. One reassurance: delisting doesn't mean losing your investment. The standard process is for the manager to liquidate the ETF's holdings and return the proceeds — equal to net asset value at that time — to investors, though that amount can of course be lower than what was originally invested depending on market conditions at liquidation.

Key Takeaways

• An active ETF lets a manager select securities at their own discretion while still trading on an exchange in real time, with its price kept near net asset value through the same creation/redemption mechanism passive ETFs use.
• Korea's rules don't grant unlimited discretion: active ETFs must maintain at least a 0.7 correlation with their comparison index, and falling below that for three consecutive months triggers mandatory delisting.
• Because daily disclosure of full holdings is required for arbitrage to work, Korea's model differs sharply from the U.S.'s semi-transparent structures, which disclose holdings only quarterly.
• In 2026, four Korea Investment Trust Management active ETFs were delisted precisely because they had beaten their benchmark by enough to push their correlation below 0.7 — a case that exposed a real flaw in the current rule.
• A "fully active ETF" without any correlation requirement is under discussion, but as of this writing it has not yet been implemented, so check the latest rules before relying on the numbers described here.

FAQ

How is an active ETF different from a traditional actively managed mutual fund?

Both let a manager pick securities at their discretion, but they trade differently. An active ETF lists on an exchange, so it can be bought or sold at a live price at any point during the trading day, and its full holdings are disclosed daily. A traditional active mutual fund isn't exchange-listed — investors can only buy or sell at a single net asset value set once a day — and its holdings are disclosed far less frequently.

Why do active ETFs charge higher fees than passive ETFs?

A passive ETF only needs to replicate an index, which requires relatively little in the way of staff and research spending. An active ETF's manager spends real resources researching and selecting securities, and that cost is typically reflected in a higher expense ratio than a comparable passive ETF.

What happens to my money if an active ETF gets delisted?

Once delisting is decided, the manager typically goes through a standard liquidation process: selling the ETF's holdings and returning the resulting net asset value to investors. You simply can no longer trade the ETF on the exchange — your investment itself isn't wiped out. That said, the amount you receive can be lower than what you originally invested, depending on market conditions at the time of liquidation.

⚠️ This article is for informational purposes only and is not investment advice. The regulatory figures and cases discussed here reflect reporting and rules current as of the time of writing, and relevant laws and exchange rules may change — check the latest disclosures from Korea's Financial Services Commission and the Korea Exchange before making investment decisions. Investment decisions and their outcomes are the sole responsibility of the investor.