Scaling Momentum: The Evolving Landscape of Active ETF Strategies in a Dynamic Market

The global ETF landscape is undergoing a profound transformation, driven by the rapid adoption of active strategies and the evolving dynamics of market demand. Active ETFs, which accounted for 51% of global ETF launches through June 2025, have become a cornerstone of modern portfolio construction, according to an ETFdb report. This shift is not merely a function of investor appetite for innovation but a response to structural changes in capital markets, regulatory frameworks, and the broader financial ecosystem. Among these strategies, momentum-based active ETFs have emerged as both a bellwether and a cautionary tale, reflecting the interplay of scalability, market cycles, and strategic adaptability.

The Rise of Active ETFs: A Structural Shift

Active ETFs have captured a significant share of investor capital, with global assets under management (AUM) reaching $1.4 trillion by mid-2025, according to a BlackRock analysis. This growth is projected to accelerate, with AUM expected to triple to $4.2 trillion by 2030, BlackRock projects. The surge is fueled by three key factors:
1. Investor Demand for Active Strategies: As passive strategies face scrutiny over their ability to generate alpha in low-volatility environments, active ETFs offer a transparent, cost-effective alternative, as BlackRock notes.
2. Regulatory Tailwinds: Evolving regulations, such as the conversion of mutual funds to ETFs, have expanded the toolkit for asset managers, ETFdb observed.
3. Advisory Adoption: Registered Investment Advisors (RIAs) now hold 45% of U.S. active ETF assets, integrating these funds into model portfolios to meet client demand for dynamic exposure, according to BlackRock.

This structural shift underscores a broader trend: the ETF wrapper is no longer confined to passive replication but is increasingly being leveraged to deliver alpha-seeking, outcome-based, and exposure-focused strategies, a point BlackRock emphasizes.

Momentum Strategies: From Triumph to Turbulence

Momentum-based active ETFs, which gained prominence during the AI-driven bull market of 2024, epitomize the duality of innovation and vulnerability. These strategies, which concentrate on stocks with strong recent price performance, thrived as investors flocked to high-flying names like Nvidia and Tesla, as [Morningstar] reported (https://www.morningstar.com/funds/momentum-etfs-stall-2025). However, the market's 2025 correction has exposed the fragility of momentum-driven approaches. Six out of nine large-cap momentum ETFs that ranked in the top decile in 2024 have since underperformed, as defensive and value stocks gained favor, Morningstar observed.

The stall in momentum ETFs is not merely a function of stock-specific underperformance but a reflection of broader market dynamics. As investors recalibrate their risk appetites in response to macroeconomic uncertainties, the underweighting of defensive sectors by momentum strategies has become a liability. This reversal highlights a critical challenge: scaling momentum strategies in a market environment that demands both agility and diversification.

Scaling Challenges and Strategic Adaptation

The operational complexity of active ETFs-particularly those with unique strategies-poses significant scaling challenges, according to a Calastone outlook. Unlike passive ETFs, which rely on pre-defined indices, active ETFs require dynamic portfolio management, liquidity management, and regulatory compliance. For momentum strategies, this complexity is compounded by the need to rebalance portfolios rapidly in response to market shifts.

Yet, not all momentum ETFs have faltered. The Invesco S&P 500 Momentum ETF (SPMO), for instance, has nearly doubled in size in Q3 2025, driven by strong inflows and price appreciation, according to ETFdb. This resilience suggests that successful momentum strategies are those that balance concentration with diversification, leveraging quantitative models to mitigate overexposure to volatile sectors.

The Path Forward: Innovation and Resilience

The future of active ETFs hinges on their ability to adapt to evolving market conditions. Innovations in alpha-seeking strategies, such as machine learning-driven portfolio optimization and outcome-based ETFs, are expanding the toolkit for investors, as BlackRock argues. Regulatory changes, including the potential for more flexible creation/redemption mechanisms, could further enhance scalability, a point highlighted in the Calastone outlook.

However, the 2025 performance of momentum ETFs serves as a reminder that no strategy is immune to market cycles. For active ETFs to sustain their growth trajectory, managers must prioritize resilience-building strategies that can navigate both bull and bear markets without sacrificing their core objectives.

Conclusion

The rise of active ETFs represents a paradigm shift in the investment landscape, offering investors a blend of flexibility, transparency, and innovation. While momentum strategies have faced headwinds in 2025, their underlying appeal-capitalizing on market trends-remains intact. The key to scaling these strategies lies in balancing agility with diversification, leveraging technological advancements, and aligning with the evolving needs of investors. As the ETF ecosystem continues to mature, the ability to adapt will define the next chapter of active ETF growth.