ETF trends to watch in 2025: All <s>active</s> non-index ETFs, all the time

The investment landscape is witnessing a significant shift with the rise of active ETFs in the United States, which accounted for a substantial portion of new fund launches and net inflows last year. This trend is largely attributed to the Securities and Exchange Commission’s rule 6c-11, which provided a uniform regulatory framework for both active and passive funds. The evolving definition of "active" has also played a role, as it now encompasses strategies that were traditionally considered index-based, such as smart beta and multifactor approaches.

The distinction between passive and active ETFs is becoming increasingly nuanced. While passive is often equated with index-based investing, the reality is more complex, with many non-market-cap index ETFs exhibiting greater tracking error than some active strategies. This has led to a reconceptualization of ETFs as being either index or non-index, rather than strictly passive or active.

Investors are drawn to the ETF structure for its flexibility and ability to achieve specific outcomes, regardless of the management style. This flexibility is particularly appealing in active ETFs, which can adjust portfolios more frequently than traditional index funds. As a result, active ETFs are expected to see continued growth, with predictions of their assets under management reaching $1.5 trillion in the U.S. this year.

Moreover, it is anticipated that the number of active ETFs will surpass that of index ETFs in the U.S., with active fixed income ETFs capturing a significant share of active net inflows. This evolution underscores the importance for financial advisors and portfolio managers to understand the dynamics at play in the ETF space and to consider the potential benefits of active ETFs in portfolio construction.

In conclusion, the ETF market is evolving with active strategies gaining prominence, offering new opportunities for investors seeking flexibility and tailored outcomes. This trend highlights the need for a nuanced understanding of the ETF landscape to make informed investment decisions.