Active ETFs and the Case for Infrastructure and Preferred Securities

The investment landscape in 2025 is marked by a seismic shift toward active ETFs, particularly in niche markets like infrastructure and preferred securities. These asset classes, long undervalued in traditional 60/40 portfolios, are now gaining traction as investors seek diversified income streams and resilience against macroeconomic volatility. Active ETFs, with their flexibility, tax efficiency, and ability to exploit market inefficiencies, are uniquely positioned to capture growth and income in these sectors-advantages that passive strategies struggle to replicate.

Infrastructure: Navigating Complexity with Active Management

Infrastructure investing is inherently complex, spanning sectors like energy, transportation, and telecommunications, each with distinct regulatory, operational, and cyclical dynamics. Passive ETFs, which typically track broad indices, often lack the granularity to navigate these nuances. Active managers, however, can selectively target high-conviction opportunities. For example, Cohen & Steers' active ETFs-CSIO and CSSD-leverage decades of expertise to focus on infrastructure opportunities and preferred securities, offering tailored exposure to underappreciated subsectors.

This adaptability is critical in a market where macroeconomic shifts, such as interest rate changes or policy-driven infrastructure spending, can disproportionately impact performance. Active strategies allow managers to dynamically adjust portfolios, hedging against risks or capitalizing on undervalued assets. As noted by BlackRock, active ETFs in infrastructure can exploit inefficiencies in regional markets, such as underperforming utilities in emerging economies or renewable energy projects in developed markets. Passive ETFs, constrained by index rules, are often too rigid to respond to such opportunities.

Preferred Securities: Expanding Access and Diversification

Preferred securities, a hybrid asset class offering equity-like upside with fixed-income characteristics, present another compelling case for active management. Passive ETFs in this space are limited by their reliance on benchmarks that exclude critical segments of the market. For instance, many passive funds focus narrowly on exchange-traded preferreds, ignoring over-the-counter (OTC) preferreds and contingent capital securities (CoCos), which offer higher yields and broader diversification.

Active ETFs, by contrast, can access these overlooked segments. Cohen & Steers highlights that active strategies can include CoCos-securities that convert to equity under certain conditions-providing income and downside protection in volatile environments. This flexibility is particularly valuable in 2025, as investors seek yield in a low-interest-rate world. Active managers can also screen for credit quality, avoiding overleveraged issuers while targeting high-yield opportunities-a level of due diligence passive ETFs cannot replicate.

Growth and Income: The Active Edge

The ability to generate both growth and income is a hallmark of active ETFs in these sectors. In infrastructure, active managers can overweight projects with strong ESG credentials or regulatory tailwinds, such as green energy initiatives, which have outperformed in 2025. In preferred securities, active strategies can exploit pricing inefficiencies in the $142 trillion fixed-income market, adjusting portfolios to capitalize on yield spreads or credit cycles according to market analysis.

Tax efficiency further amplifies these advantages. Active ETFs utilize in-kind redemption mechanisms to minimize capital gains distributions, a critical benefit for income-focused investors according to research. This contrasts with passive mutual funds, which often distribute gains annually, eroding returns. T. Rowe Price notes that active ETFs in preferred securities can reduce tax liabilities by strategically managing turnover, a feature particularly relevant in markets with lower trading volumes.

The Passive ETF Limitations

While passive ETFs remain dominant in terms of assets under management as of August 2025, their structural constraints are evident in infrastructure and preferred securities. For instance, passive funds tracking the S&P 500 or MSCI World indices offer little exposure to infrastructure, relying on indirect holdings in construction or engineering firms. Active ETFs, however, can directly invest in infrastructure operators, toll roads, or renewable energy projects, aligning more closely with the sector's income and growth potential according to industry analysis.

Similarly, passive preferred securities ETFs often exclude high-yield OTC instruments, limiting diversification. Morningstar reports that active ETFs in this space have attracted inflows by offering broader market access, with some funds outperforming passive peers by double digits in 2025.

Conclusion

As investor demand for tailored exposure and income generation intensifies, active ETFs are redefining the infrastructure and preferred securities markets. Their ability to navigate complexity, access overlooked opportunities, and optimize tax efficiency positions them as superior tools for capturing growth and income in these asset classes. While passive strategies will remain relevant in broad-market indices, the structural advantages of active ETFs make them indispensable for investors seeking to capitalize on the unique dynamics of infrastructure and preferred securities in 2025 and beyond.