The growth of active ETFs has been more than impressive. In a few short years, the number of funds launched has been staggering, while the amount of assets in active ETFs has surged. Both retail and institutional investors as well as financial advisors have quickly added them to portfolios to generate larger returns and benefit from lower taxes.
And now it looks like active ETFs may hit another milestone.
The number of active ETFs on the market has the potential to overtake passive investment options. As the number of indexes and themes that can be tapped by ETFs has dwindled, passive launches have nearly dried up. But there is plenty of room for active strategies to grow. In the end, the number of active ETFs will overtake the number of passive ones.
Active ETF Growth
Exchange-traded funds (ETFs) and indexing seem to go hand-in-hand. Probably because the very first ETFs were passive vehicles designed to track the S&P 500 and similar broad market indexes. Since then, many of these broad, market-owning vehicles have surged in assets to become some of the biggest funds of any kind on the market. The “first” ETF, the SPDR S&P 500 ETF Trust, has a staggering $628 billion in assets.
However, these days, ETFs and indexing aren’t mutually exclusive. It’s quickly swinging the other way.
Active ETFs debuted in 2010, but it wasn’t until recently that the number of active ETFs on the market took off. The reasons have been vast. Many of these came from the new SEC regulation, dubbed rule 6c-11.
New semi- and non-transparent structures that allowed managers to keep their “secret sauce” hidden to prevent front running allowed more investment shops to feel comfortable in the structure. Mutual fund-to-ETF conversions instantly provided new growth and share launches. Copycat fund launches of existing mutual funds using the same managers and styles also boosted growth. And now, exemptions allowing ETFs to operate as share classes of existing mutual funds have plenty of potential to continue this growth.
Active ETFs have transitioned from being a niche product to a significant contender in the investment vehicle landscape.
Data Supports the Growth
The proof is in the pudding. According to a report from Morningstar, between 2015 and 2019, 307 active ETFs were launched and listed on major exchanges. After the SEC added rule 6c-11 in late 2019, the number of active ETF launches has exploded. Today, there are 1,764 actively managed ETFs currently listed. More than 85% of them were listed after 2020. 1
This chart from Morningstar highlights the jump in launches of active ETFs. You can see the jump upward after rule 6c-11 was enacted.
Source: Morningstar
What’s truly staggering is that in a short amount of time, the number of active ETFs has quickly grown just a stone’s throw away from passive funds on the market. As we said, there are currently 1,764 active ETFs on the market, as of September 2024. This compares to 2,121 index-tracking ETFs. Less than 30% of those have been listed since 2020.
Moreover, fund flows to active strategies have started to pick up as well. From the beginning of 2019 through October 2024, investors plowed more than $603 billion into active ETFs. In the first 10 months of 2024, active ETFs managed to take in $225 billion. Looking at organic growth — which removes previously existing assets — active ETFs have grown by about 20% per year.
Plenty of Growth Ahead
With the number of listings continuing to increase, active ETFs have plenty of potential to overtake the number of passive strategies available in a very short time frame. This is a classic case of demand and supply.
Investors of all sizes and financial advisors have turned to active ETFs over active mutual funds … to the tune of $2.2 trillion in outflows. Driven by lower costs, better performance, and tax efficiency, active ETFs are better structures than mutual funds. They now form the building blocks of portfolios just like passive index trackers.
As for asset managers, active ETFs are now seen as their saviors. Thanks to those massive mutual fund outflows, active ETFs are considered a growth strategy and a way to survive the changes toward low-cost investment management. Rising mutual-fund-to-ETF conversions, share class exemptions, and continued new launches are ways to keep their growth going. Moreover, there are limitless ways to do active management and buy assets. However, the number of passive ideas is slimming. Launching a new S&P 500 tracker doesn’t make sense from a business point of view as it will never gather enough assets to be successful. This makes active ETFs the go-to way to find growth from an asset manager’s point of view. Meanwhile, new entrants such as hedge funds and alternative managers point to the structure’s lower legal requirements and ease of capital raising.
Together, rising investor demand along with rising asset manager interest create a flywheel that can truly perpetuate the investment vehicle. With that, the number of active ETFs listed on exchanges will and should surpass the number of passive ones sooner rather than later.
And with only about 8% of assets in these active funds versus passive ETFs, there is plenty of growth potential to gather capital, too.
Popular Active ETFs
These ETFs are sorted by their YTD total returns, which range from -2.7% to 9.7%. They have expense ratios between 0.17% and 0.36% and assets under management between $5B and $30B. They are currently yielding between 0.8% and 9.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JEPQ | JPMorgan Nasdaq Equity Premium Income ETF | $5.58B | 7.8% | 9.7% | 0.35% | ETF | Yes |
| DFUV | Dimensional US Marketwide Value ETF | $8.5B | 6.2% | 1.5% | 0.21% | ETF | Yes |
| DFAC | Dimensional U.S. Core Equity 2 ETF | $20.9B | 5.7% | 0.8% | 0.17% | ETF | Yes |
| JEPI | JPMorgan Equity Premium Income ETF | $29.2B | 4.1% | 7.4% | 0.35% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $9.7B | 2.1% | 5.3% | 0.35% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $22.8B | 1.7% | 5.2% | 0.18% | ETF | Yes |
| AVUV | Avantis U.S. Small-Cap Value ETF | $6.7B | 0.80% | 1.4% | 0.25% | ETF | Yes |
| DFAT | Dimensional U.S. Targeted Value ETF | $8.2B | -0.4% | 0.8% | 0.28% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $5.1B | -2.7% | 4.9% | 0.36% | ETF | Yes |
In the end, active ETFs are quickly eating passive ETFs’ lunch when it comes to new choices on the market. The product surge should continue for the long haul and surpass passive strategies by a wide margin. The tailwinds and investor demand will make sure of that.
Like any investment, due diligence is needed. Just because we have more choices doesn’t mean all those choices are valid. Investors and their advisors must work harder to find the right funds amid all the new products.
Bottom Line
Active ETFs continued to surge in popularity and listings. And now, they have the ability to outnumber index products on the market. Investor demand and asset manager supplies are creating a tornado of growth for the sector.
1 Morningstar (September 2024). Will Active ETFs Outnumber Passive ETFs?
