In a short time, active ETFs have gone from a niche asset class and fund vehicle to being one of the core ways investors build their portfolios. Thousands of new funds have been launched, while assets in active ETFs have surged. Investors, both big and small, have taken a shine to the fund type’s benefits and positives. With torrid growth behind them, the question is what comes next?
Investment and asset manager State Street may have the answer.
Looking at data, fund flows, and investor interest, several trends are starting to form that will shape the active industry for the years to come. These trends will shape the variety of new fund launches, asset flows, and ultimately, what investors can choose for their portfolios. And with that, active ETFs could see plenty of new demand and growth.
From Niche To Mainstream
The ETF structure was truly a game-changer for portfolios and how we all invest. The structure’s quirks have made it an advisor and individual favorite- offering intraday tradability, lower costs, and tax savings. Because of this, ETFs have become the de facto and first stop for asset allocation models and portfolio construction.
Active ETFs have only enhanced the fund type’s wins.
When active ETFs launched back in 2008, they seemed like a novelty. There were only a handful of funds, and performance was mixed compared to the growing field of index ETFs. However, thanks to SEC Rule 6c-11, the introduction of semi- and non-transparent structures, and mutual fund-to-ETF conversions, the number of active ETFs has increased significantly, transforming from a niche to a mainstream investment.
Today, a variety of investors have turned to active ETFs as fundamental portfolio building blocks rather than simply a specialty or satellite position.
With the structure now mainstream, its growth is assured. How that growth is translating into new funds and trends is quite interesting. Through a new research paper, asset manager and ETF pioneer State Street has made some interesting predictions on the sector’s growth and identified three major active ETF trends.
1- Dominating Flows & Launches
It’s no secret that active ETFs have gathered plenty of investor funds and media attention over the last couple of years. Looking at fund flow data, active ETFs scored more than $166 billion in inflows during 2023. This was a record, until last year, when they gathered more than $330 billion in fund flows. That was over 22% of all ETF inflows across the globe. 1
According to State Street, this year and going forward, active ETFs will continue that trend. Looking at year-to-date fund flows as of the end of June, active ETFs have already taken more than 33% of ETF inflows. The reasons for the surge in flows come down to why investors are choosing active over passive.
Originally, active equaled alpha. The first way of active ETF products was designed to simply outperform the market and generate additional returns. Those funds are still there and have gotten a significant boost with new systematic and enhanced active strategies. However, the types of active ETFs have expanded to cover a wide variety of investor goals. For example, buffer ETFs allow investors to pursue specific outcomes, while option funds allow for income generation and mitigating risk. You have a host of new active fixed income ETFs designed to respond to changing macro, credit, and rate trends. At the same time, thematic growth ETFs have expanded beyond indexing and sector segmentation.
All in all, changes in investor behavior and attitude to how they use active ETFs will continue to drive fund flows into the vehicle and make active the dominant way to build portfolios.
2- Alternatives Go ETF
The whole point of building a portfolio of different asset classes is that they are supposed to move in different directions and magnitudes. This diversification is what allows us to smooth out returns and reduce losses. It’s the basis for Modern Portfolio Theory. The problem is that, over time, many asset classes are now becoming more correlated, not just in direction but in magnitude. Stocks and bonds have quickly become correlated with each other.
To that end, institutional investors for years have looked towards “alternatives” to generate non-correlated returns. And now, active ETFs have taken up the alternatives banner. This chart from the asset manager highlights the surge in alternative ETF flows. As you can see, investors have taken notice.
Source: State Street
Active ETFs are perfect for the alternatives market as they allow for reduced costs and potential tax savings. This includes how they are structured to avoid K-1 statements and minimal to no capital gains distributions. As a result, many ETF issuers have started to package commodities, managed futures, precious metals, and hedge-fund strategies into active ETFs.
Additionally, the growth of private equity and private credit, as well as rules changes that allow these assets into retirement plans, are all tailwinds for the growth of alternatives and active ETFs. As investors continue to look for ways to diversify their portfolios and add non-correlated assets, active ETFs will be major winners.
3- Digital Disruption
Finally, State Street predicts that technology will be a driving force about active ETF growth. The tech sector and other technology-based asset classes like Bitcoin will be one of the most significant long-term growth drivers for active ETFs. Trends like artificial intelligence, internet of things (IoT), data centers, blockchain, and digital payments are all just getting started.
All of these trends bode well for active management and the rapid pace of change that occurs in technology.
Additionally, State Street predicts that crypto and other digital assets will be a major sub-driver for active ETF growth. Just as the adoption of alternatives, bitcoin features a very low correlation to both stocks and bonds, 0.46/0.23, respectively. As such, more investors are turning towards these asset classes for diversification benefits. With more institutional investors now adding these assets, there is plenty of room to run for retail investors.
Active ETFs Are Now Portfolio Staples
While State Street wouldn’t put a defined estimate on the growth of active ETFs in its report, it’s safe to say that the fund type is quickly dominating passive funds and other portfolio building blocks. And these three trends will only enhance the active ETFs’ growth profile going forward.
For investors, this is not a bad thing at all. More choice is always good, and if we can use Active ETFs to build more efficient portfolios, that’s even better.
Popular Active ETFs
These ETFs are sorted by their YTD total returns, which range from -2.7% to 7.8%. They have expense ratios ranging from 0.17% to 0.36% and assets under management between $5 billion and $30 billion. They are currently yielding between 0.8% and 9.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JEPQ | J.P. Morgan Nasdaq Equity Premium Income ETF | $5.58B | 7.8% | 9.7% | 0.35% | ETF | Yes |
| DFUV | Dimensional US Marketwide Value ETF | $8.5B | 6.2% | 1.5% | 0.21% | ETF | Yes |
| DFAC | Dimensional U.S. Core Equity 2 ETF | $20.9B | 5.7% | 0.8% | 0.17% | ETF | Yes |
| JEPI | JPMorgan Equity Premium Income ETF | $29.2B | 4.1% | 7.4% | 0.35% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $9.7B | 2.1% | 5.3% | 0.35% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $22.8B | 1.7% | 5.2% | 0.18% | ETF | Yes |
| AVUV | Avantis U.S. Small-Cap Value ETF | $6.7B | 0.80% | 1.4% | 0.25% | ETF | Yes |
| DFAT | Dimensional U.S. Targeted Value ETF | $8.2B | -0.4% | 0.8% | 0.28% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $5.1B | -2.7% | 4.9% | 0.36% | ETF | Yes |
For investors, active ETFs have been like a breath of fresh air. They’ve enhanced portfolios, helped define outcomes, and driven returns. The following three major trends of the fund type will only enhance this further. The growth of alternatives will drive more diversification, while technology trends will provide much-needed growth for the long haul. Finally, the sheer number and variety of active ETF types will grow our toolboxes to meet our financial goals.
Bottom Line
Active ETF adoption and fund flows have been torrid to say the least. But the best days could be ahead. According to State Street, the three major trends of enhanced use, alternatives, and digital adoption are likely to drive future growth in active ETFs.
1 State Street (July 2025). ETF Impact Report
