Exchange-traded funds have spent most of their three-decade existence tracking indexes rather than trying to beat them, but a wave of new products is changing that dynamic. Actively managed ETFs now outnumber their passive counterparts, marking a shift in how investors can access professional money management.
The surge follows a 2019 regulatory change that streamlined the ETF launch process, according to research by Christopher Murphy, head of ETF specialists at T. Rowe Price. Asset managers with long track records in active mutual funds have responded by packaging their strategies into ETF wrappers, giving investors a new way to pursue returns that go beyond index performance.
Today, 89% of the $13.4 trillion invested in ETFs sits in passive strategies, but the active segment is growing as investors discover they can combine skilled portfolio management with the tax efficiency and lower costs that ETFs offer.
For investors, the distinction matters. With a passive ETF, portfolio holdings change only to match whatever index the fund tracks. An actively managed ETF, by contrast, gives portfolio managers discretion to adjust positions based on research and market conditions, Murphy wrote in his report.
Read More: Active Financials ETF Holds Sector Earnings Leaders
That flexibility becomes valuable in market environments where simply matching an index isn’t enough. Active strategies tend to perform best in less efficient corners of the market, such as small-cap stocks or emerging markets, where professional research can uncover opportunities that indexes might miss or misprice.
Professional Management Meets ETF Efficiency
The appeal of active ETFs lies in what they preserve from both worlds, Murphy noted. Investors get the same professional oversight they’d find in an actively managed mutual fund, with portfolio managers making buy and sell decisions on behalf of all shareholders. But they also gain the structural advantages that made ETFs popular in the first place.
Those benefits start with cost, according to the research. ETF expense ratios run lower than comparable mutual funds because the structure eliminates certain operational expenses. There’s no minimum investment – investors can buy a single share – and trades happen throughout the day on exchanges rather than once daily after markets close.
Tax efficiency represents another edge. When mutual fund shareholders redeem their positions, the fund may need to sell holdings to raise cash, potentially triggering capital gains that get distributed to all remaining shareholders. ETF shareholders, by comparison, sell their shares to other investors on an exchange, leaving the fund’s underlying holdings untouched.
When Active Makes Sense
The case for active management strengthens when market conditions create dispersion. During periods when stocks move largely in lockstep, tracking an index works fine. But when individual securities diverge based on company-specific factors, skilled managers can add value by identifying which holdings deserve overweight or underweight positions.
T. Rowe Price’s approach pairs its existing investment research capabilities with the ETF structure. The firm’s active ETF strategies draw on the same teams and processes that manage its mutual funds, applying decades of fundamental research experience to a newer vehicle format.
For investors building portfolios, active ETFs offer a way to pursue outperformance without sacrificing the operational benefits that made passive ETFs attractive. The structure doesn’t guarantee better returns — active management involves higher costs than pure indexing and carries the risk of underperformance — but it does provide professional decision-making in a tax-efficient, low-minimum wrapper that didn’t exist until recently.
For more news, information, and analysis, visit our Active ETF Content Hub.
