Active ETF Innovation and Performance Leadership in 2025

The investment landscape in 2025 has witnessed a seismic shift in favor of active ETFs, driven by regulatory tailwinds, investor demand for innovation, and the structural advantages of the ETF format. For the first time in the 30-year history of the ETF industry, active ETFs have outnumbered passive counterparts in the U.S., capturing 51% of the 4,300 ETFs in the market as of June 2025 [3]. This milestone reflects a broader global trend: active ETFs now represent 9% of global ETF assets under management (AUM), up from 2% at the end of 2019 [3]. In Australia, the compound annual growth rate (CAGR) of active ETFs has reached 53% since 2018, nearly double the 27% CAGR of passive ETFs [1].

The Drivers of Active ETF Growth

The surge in active ETF adoption is underpinned by three key factors. First, regulatory modernization, such as the SEC’s 2019 reforms, streamlined the approval process for active strategies, enabling firms to innovate more rapidly [3]. Second, investors are increasingly prioritizing transparency, liquidity, and tax efficiency—features inherent to ETFs—which active strategies now leverage to outperform passive benchmarks in volatile markets [2]. Third, the proliferation of model portfolios and alternative asset allocations has expanded the use cases for active ETFs, particularly in equity, fixed income, and alternative exposures [3].

Despite short-term challenges—such as underperformance in fixed-income categories due to stubborn interest rates and credit spreads—active ETFs have attracted $354 billion in inflows year-to-date in 2025, growing five times faster than passive ETFs [4]. This resilience underscores their role as complementary tools to passive strategies, offering enhanced diversification and risk management in an era of geopolitical uncertainty and market dispersion [5].

Pioneers of Innovation: NEOS Investments and Baron Capital

Among the vanguard of active ETF innovation, NEOS Investments and Baron Capital stand out for their strategic ingenuity and performance leadership.

NEOS Investments has redefined income generation through options-based strategies. Its flagship product, the NEOS Nasdaq-100 High Income ETF (QQQI), was awarded “Best New Active ETF” at the 2025 ETF.com Awards for its tax-efficient, data-driven covered call approach on the Nasdaq-100 index [5]. Launched in January 2024, QQQI exemplifies NEOS’s broader suite of options-based ETFs, which include products focused on real estate, gold, and Bitcoin [1]. The firm’s NEOS S&P 500 High Income ETF (SPYI), for instance, writes call options on the S&P 500 and has delivered a 12.15% distribution rate as of June 2025, incorporating return-of-capital components to minimize tax drag [6]. Collectively, NEOS’s options-based ETFs have amassed $5.7 billion in AUM since 2022, reflecting their appeal to income-focused investors [2].

Baron Capital has demonstrated prowess in equity growth strategies. Its Large Cap Growth Strategy gained 25.0% in Q2 2025 alone, outperforming the Russell 1000 Growth Index (17.55%) and the S&P 500 Index (10.94%) [3]. This success stems from concentrated stock selections in high-growth sectors like Information Technology and Consumer Discretionary, with key contributors including NVIDIA and Amazon [3]. Over the first half of 2025, the strategy appreciated 8.54%, continuing to outperform its benchmarks [1]. Baron’s approach highlights the potential of active management to capitalize on market inefficiencies, particularly in sectors where dispersion is high.

The Future of Active ETFs

As the ETF industry evolves, active strategies are poised to play an even greater role. Deloitte projects U.S. active ETF AUM to grow from $856 billion in 2024 to $11 trillion by 2035 [5], while global AUM is expected to reach $4 trillion by 2030 [1]. Innovations such as dynamic sector rotation, hedged equity income, and alternative asset allocations will further differentiate active ETFs from passive benchmarks.

For investors, the rise of active ETFs offers a compelling duality: the cost and liquidity benefits of ETFs combined with the potential for alpha generation through skilled management. Pioneers like NEOS and Baron Capital are not only capitalizing on this shift but also setting new standards for performance and innovation in an increasingly competitive market.

Source:
[1] Active ETFs are reshaping the market | iShares - BlackRock [https://www.blackrock.com/au/insights/ishares/how-active-etfs-are-reshaping-the-market]
[2] Six must-knows about active ETFs [https://www.robeco.com/en-int/insights/2025/07/six-must-knows-about-active-etfs]
[3] Active ETFs May Thrive even in Down Markets [https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/active-etfs-may-thrive-even-in-down-markets.html]
[4] Passive Funds Beat Active Amid This Year's Market Volatility [https://www.morningstar.com/funds/passive-funds-beat-active-amid-this-years-market-volatility]
[5] ETF growth market opportunities | Deloitte Insights [https://www.deloitte.com/us/en/insights/industry/financial-services/financial-services-industry-predictions/2025/etf-growth-market-opportunities.html]
[6] Troy Cates of NEOS Talks Tax-Efficient Income in 2025 [https://www.etftrends.com/monthly-income-channel/cates-neos-tax-efficient-income-2025/]