Active ETFs Double to $966B, Reshaping Fund Distribution

The mechanics matter. An active ETF discloses its holdings daily – the same transparency that made passive ETFs successful – the manager can trade without announcing each move. That structure, known as non-transparent active ETF, never attracted serious flows. The winners are fully transparent active ETFs where the manager publishes the full portfolio every day. Investors decided that daily disclosure is a feature, not a bug.

Fees are falling, although not as fast as on the passive side. The average active ETF charges 0.60% in expense ratio, against roughly 0.03% for the biggest S&P 500 index ETFs. That 57-basis-point gap shrinks when you factor in capital gains. Active mutual funds pass taxable gains to shareholders when the manager rebalances. Active ETFs, like their passive cousins, use the creation-redemption mechanism to keep capital gains inside the fund. Over a five-year horizon, that tax advantage can offset the entire fee difference for a taxable investor.

The category is still small relative to the $8 trillion U.S. ETF market and the $19 trillion mutual fund complex. The trend line is steep. Net inflows into active ETFs hit $165 billion in 2024, more than double the prior year. At that pace, the category will clear $1 trillion before year-end. The broader market should take the signal. Active fund managers who refuse to offer an ETF version are ceding distribution to those who will.