The Growing Popularity of Active ETFs: What They Are and Why They’re on the Rise
Active exchange-traded funds (ETFs) have been around for a while, but they’ve experienced a notable surge in popularity in recent years. Investors might already be familiar with passive ETFs, which track the performance of an index, such as a major stock market benchmark. However, active ETFs aim to outperform a specific benchmark, distinguishing them from passive counterparts.
What’s the Difference Between ETFs and Funds?
Both ETFs and mutual funds can employ either active or passive strategies. However, there are some key differences between the two. ETFs trade on stock exchanges, similar to shares, which means their price fluctuates throughout the trading day, and buying or selling them incurs a dealing charge. Mutual funds, on the other hand, price only once a day. Despite these differences, ETFs and mutual funds can serve similar investment purposes.
Why Are Active ETFs Becoming Popular?
Active ETFs are becoming increasingly popular due to their potential to outperform the market, all while maintaining the advantages of the ETF structure. Active management involves a team of fund managers who conduct research to identify investment opportunities and build a portfolio that aims to beat the ETF’s benchmark. However, as with any investment, there’s no guarantee of success.
In contrast, passive ETFs simply seek to replicate the performance of their benchmark. If the benchmark falls in value, the ETF will fall in line with it. The appeal of active ETFs lies in the ability to blend active management within the familiar and accessible ETF framework.
How Quickly Are Active ETFs Growing?
Active ETFs have seen significant growth recently, with assets exceeding $900 billion in 2024 and heading toward the $1 trillion mark. Though they currently represent a smaller portion of the total ETF market—global ETFs manage around $14 trillion—the growth rate is impressive. Active ETFs are expected to continue expanding, with forecasts indicating that assets could reach $4 trillion by 2030.
In 2024 alone, new investments into active ETFs accounted for 25% of total ETF inflows globally. Furthermore, over 60% of all newly launched ETFs in the past year have been actively managed.
Global Growth of Active ETFs
Although the trend of active ETFs is global, some regions are more dominant in the market. The regulatory environment has played a role in the growth of active ETFs in certain areas, with some countries offering tax benefits or regulatory advantages that make active ETFs particularly appealing. The increased flexibility provided by certain rule changes has allowed more rapid expansion of active ETFs in these regions.
Other regions, while slower to adopt active ETFs, are beginning to see increased demand. Regulatory changes under consideration in some jurisdictions could further boost the popularity of active ETFs. As a result, industry experts predict that the ETF market in these areas is likely to experience significant growth in the near future.
The Future of Active ETFs
With interest in active ETFs continuing to rise and more fund managers exploring this space, the next few years promise to be exciting for the global ETF market. Changes in regulations and growing investor demand suggest that active ETFs will play an increasingly important role in investment portfolios worldwide.
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