Active ETFs and Their Role in Driving the Next Wave of ETF Growth

The ETF landscape is undergoing a seismic shift. For years, passive ETFs dominated the market with their low-cost, index-tracking appeal. But in 2025, active ETFs began to outpace their passive counterparts in innovation, flows, and institutional adoption. By 2026, this trend is accelerating, with active ETFs poised to redefine portfolio construction, risk management, and investor returns. For financial advisors and institutional investors, the case for prioritizing active ETFs over passive alternatives is no longer speculative-it's data-driven and structural.

The Growth Imperative: Why Active ETFs Are Winning

Active ETFs are no longer a niche product. According to a report by BlackRock, global active ETF assets under management (AUM) are projected to triple to $4.2 trillion by 2030, driven by their flexibility, tax efficiency, and ability to adapt to macroeconomic uncertainty. In 2025 alone, active ETFs accounted for 51% of global ETF launches, with U.S. active ETFs outnumbering index ETFs by a staggering 7:1 margin. This growth is not just about volume-it's about value. Active ETFs are increasingly being used to express strategic and tactical views in sectors like technology and global infrastructure, where market dispersion is high and passive strategies struggle to capture alpha.

Institutional demand is a key catalyst. By the end of 2025, institutional investors had allocated $750 billion to active ETFs, with these products capturing 34% of total ETF flows. The appeal lies in their ability to deliver incremental alpha while maintaining the liquidity and cost efficiency of ETFs. European investors, for instance, are gravitating toward active ETFs that offer modest outperformance and low volatility, aligning with risk-averse preferences in a post-pandemic, post-geopolitical-shock world.

Cost and Tax Efficiency: Active ETFs Outperform on Both Fronts

One of the most persistent arguments against active management is its higher cost. But active ETFs are closing this gap. Data from ETF Trends shows that active ETFs have average expense ratios of 0.63%, significantly lower than the 1.02% charged by active mutual funds. This cost advantage improves the odds of outperformance, as active ETF managers face a lower hurdle to beat passive benchmarks.

Tax efficiency is another critical edge. Active ETFs leverage in-kind creation and redemption mechanisms to minimize taxable events, a structural advantage over both passive ETFs and active mutual funds. In 2024, only 9% of active equity ETFs distributed capital gains, compared to 64% of active mutual funds. The median capital gains distribution for active ETFs was a modest 1.1% of NAV, versus 6.3% for mutual funds. For taxable portfolios, this difference is material. Advisors seeking to optimize after-tax returns should prioritize active ETFs, particularly in high-turnover or niche markets where passive strategies may inadvertently trigger capital gains.

Adaptability in Volatile Markets: The Active Edge

The past few years have been a masterclass in market volatility. Central banks have swung from aggressive rate hikes to rapid cuts, while geopolitical tensions and AI-driven disruptions have created unpredictable dispersion in asset classes. In such environments, active ETFs shine. Unlike passive ETFs, which are constrained by index rules, active ETFs can dynamically adjust portfolios in real time. For example, active fixed-income ETFs have surged in popularity, with 39% of total ETF flows in 2025 directed to these products-growth rates over five times those of passive alternatives.

This adaptability is not just theoretical. In 2025, active ETFs demonstrated superior risk-adjusted returns in sectors like global infrastructure and thematic investing, where active managers capitalized on market inefficiencies. For institutional investors, this means active ETFs can serve as both a hedge and a growth engine in uncertain times.

The Hybrid Future: Active ETFs as Portfolio Essentials

The rise of active ETFs does not signal the death of passive strategies. Instead, it reflects a shift toward hybrid portfolios that combine the best of both worlds. Passive ETFs remain indispensable for broad market exposure at low cost, but active ETFs are increasingly used to enhance returns, manage risk, and express views in volatile or fragmented markets.

Janus Henderson anticipates further innovation in 2026, with active ETFs focusing on client-centric solutions like derivative-income strategies and private-asset exposure. This evolution underscores a broader trend: investors are no longer choosing between active and passive-they're integrating both to build resilient, dynamic portfolios.

Conclusion: A Strategic Shift for Advisors and Institutions

For financial advisors and institutional investors, the message is clear: active ETFs are not just a passing trend-they are a structural shift in asset management. Their growth trajectory, cost and tax advantages, and adaptability in volatile markets make them a superior choice for clients seeking flexibility and incremental alpha. As the ETF industry evolves, those who prioritize active ETFs will be better positioned to navigate macroeconomic uncertainty and deliver superior outcomes in 2026 and beyond.