Though there are still a few months left in 2025, investors and advisors can start to identify a few takeaways in the world of ETFs. Perhaps the strongest narrative for the last several years has been the steady but continuous rise of active ETFs. Following the arrival of the ETF rule in 2021, these ETFs have proliferated significantly, with more and more firms joining the active ETF space. That has given investors more and more options to consider, with three big reasons to dive in now.
Embrace Active ETFs’ Tax Efficiency
For many investors, these ETFs are tempting as an alternative to mutual funds — and for good reason. Active ETFs produce fewer taxable events than mutual funds do, thanks to the former’s creation/redemption mechanism. Mutual funds, by contrast, have a shareholder structure that sees more tax impact for all shareholders overall. The ETF’s indirect creation/redemption mechanism can, of course, produce cap gains implications, but not in the same way, reducing the number of tax incidents.
A Fundamental Advantage in Fixed Income
While many may initially think of active ETFs and associate them with equities, they play a major role in fixed income. Many passive bond offerings are obliged to follow their index allocations to the letter. That may be pretty straightforward in equities, but bonds can prove more complicated.
Say a passive bond ETF must keep a 30% allocation to corporate bonds. Some of those bonds, if in the junk-rated category, may default or face other, sudden issues. A passive ETF may not be able to adjust quickly enough, and its 30% allocation could become a 27% or 28% allocation. Active fixed income ETFs, by contrast, can adapt without requiring an index committee meeting, rolling certain debt issues or swapping in one bond for another.
Active Approach in Low Information Markets
Perhaps one of active ETFs’ greatest strengths is their ability to provide that focus on fundamental research and metrics. That matters a lot when investing in areas where most investors may lack information, like foreign markets. Flexibility to adapt to geopolitical or policy changes matters quite a bit there, too. Given the significance of ex-U.S. investments to portfolios this year, active ETFs with foreign equities approaches can stand out. Many have already outperformed their large, passive rivals therein.
Together, active ETFs offer some real benefits worth considering for investors. For those wanting to either add some active equities at the edges of their investments, or even make a swap in their core allocations, the time could be now for active.
For more news, information, and strategy, visit the Future ETFs Content Hub.
