The debate between active and passive investing is entering a new era. According to the Fast-Growing Market of Active ETFs report from the SEC’s Division of Economic and Risk Analysis (DERA), the active ETF has moved from a niche experiment to a dominant force in portfolio construction.
“With more than 3600 ETFs holding assets exceeding $10 trillion, understanding this market is critical, not just because of its size, but because of its evolving dynamics,” said Joshua White, chief economist and director of the SEC’s DERA to Financial Regulation News.
For advisors seeking to anticipate where portfolio construction is headed, the data offers several important signals.
A Watershed Moment in Fund Growth
While passive ETFs continue to dominate total assets, growth dynamics tell a very different story. Between 2020 and 2024, the number of active ETFs expanded by more than 300%, representing an average annual growth rate of approximately 39%. Over the same period, passive ETFs grew by just 15%.
This surge in active ETF launches aligns with broader market trends. For example, active ETF strategies accounted for roughly 60% of new ETF launches in the early months of 2025, underscoring the category’s growing momentum and advisor interest.
By the end of 2024, active ETFs accounted for an estimated 45% of all ETFs — up significantly from just 20% in 2020. Industry data suggest that the total number of active ETFs may have eclipsed passive ETFs by mid-2025. This rapid product proliferation makes active ETFs impossible to ignore in modern portfolio discussions.
The Cost of Innovation
Active management, even in ETF form, remains more expensive than passive indexing. However, the cost differential depends heavily on how expenses are measured. As of 2024, asset-weighted expense ratios averaged approximately 0.12% for passive ETFs and 0.49% for active ETFs. On an equal-weighted basis, the gap narrows, with passive ETFs averaging 0.45% and active ETFs 0.70%.
DERA notes that much of this disparity reflects the influx of newer, smaller active funds that have yet to achieve scale. For advisors, expense ratios remain a critical consideration. However, they must be evaluated alongside factors such as strategy differentiation, risk management, and after-tax outcomes.
A More Diverse Issuer Landscape
One of the most notable structural differences between active and passive ETFs is issuer concentration. Passive ETFs remain dominated by the industry’s largest players. BlackRock, Vanguard, and State Street collectively control at least 87% of passive ETF assets.
The active ETF market, by contrast, is far more fragmented. Leading issuers include Dimensional, J.P. Morgan, First Trust, American Century, and Capital Group, among others.
Unlike passive ETFs, where brand strength is often tied to cost leadership and index construction, active ETF competition centers on intellectual capital, portfolio management expertise, and differentiated research processes.
This fragmentation reflects more than just market share distribution. It signals a competitive shift. The ETF wrapper is no longer the exclusive domain of the largest indexing firms. Instead, it has become a platform through which traditional active managers, quantitative firms, and even niche specialists can deliver strategies in a tax-efficient, transparent structure.
For advisors, that diversity expands the opportunity set. However, it also increases due diligence demands. Access to a broader range of institutional philosophies — fundamental, factor-based, quantitative, thematic, or outcome-oriented — introduces more tools for portfolio customization. At the same time, it requires deeper evaluation of manager track records, capacity constraints, and organizational stability.
The Advisor’s Takeaway
The rapid expansion of active ETFs has been enabled in large part by regulatory developments, most notably Rule 6c-11 (the ETF Rule) and the approval of semi-transparent structures that allow managers to protect proprietary strategies while preserving the liquidity and tax efficiency of the ETF wrapper.
For advisors, the innovation lies in the fusion of benefits: the research-driven approach of traditional active management delivered via a vehicle that offers intraday liquidity and transparency. As we navigate a more volatile market regime, these active vehicles are becoming the preferred tool for advisors looking to “fine-tune” portfolios beyond simple beta.
Originally published on Advisor Perspectives.
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