Tax-Efficient Active ETFs: A Strategic Edge for 2026 Portfolios

The investment landscape in 2025 has witnessed a seismic shift toward active ETFs, driven by their dual promise of market outperformance and tax efficiency. With over one-third of all ETF inflows in 2025 directed toward active strategies-up from 23% in 2024-investors are increasingly prioritizing tools that align with long-term growth and tax optimization according to AllianceBernstein's insights. This trend is epitomized by AllianceBernstein's AB US Equity ETF (XCHG), launched in December 2025 as part of the firm's expanding active ETF lineup. XCHG, which targets U.S. equities with a tax-efficient mandate, underscores how institutional-grade strategies are now accessible in ETF form, offering a compelling edge for 2026 portfolios.

The 2025 Surge in Active ETFs: A Tax-Aware Revolution

Active ETFs have surged in popularity, with year-to-date flows in 2025 surpassing $378 billion, a figure that dwarfs all prior annual records. This growth reflects a broader investor shift toward strategies that combine active management with structural tax advantages. For instance, active ETFs like XCHG leverage in-kind creation and redemption processes to minimize capital gains distributions, a feature that sets them apart from traditional mutual funds. According to a report by J.P. Morgan, active ETFs distributed capital gains averaging just 1.81% of net asset value (NAV) in 2022, compared to 5.35% for active mutual funds. This tax efficiency is critical in volatile markets, where frequent trading can amplify taxable events.

AllianceBernstein's XCHG exemplifies this innovation. By focusing on U.S. equities and incorporating tax-aware portfolio construction, the fund aims to deliver long-term capital growth while mitigating unnecessary tax drag. Its launch in 2025 aligns with a broader industry trend: active ETFs now account for 42% organic growth in 2025, outpacing passive ETFs by over fivefold. This momentum suggests that investors are not merely chasing returns but are increasingly prioritizing after-tax outcomes.

Tax-Loss Harvesting: Active ETFs as a Strategic Tool

Tax-loss harvesting-selling investments at a loss to offset gains-has become a cornerstone of tax-efficient investing. Active ETFs, with their flexibility and diversification, are particularly well-suited for this strategy. For example, the T. Rowe Price Capital Appreciation Equity ETF (TCAF), which charges a 0.31% expense ratio, has historically enabled investors to harvest losses while maintaining exposure to high-quality large-cap stocks. Fidelity Institutional notes that ETFs' in-kind redemption mechanisms further enhance this strategy by reducing capital gains distributions and adhering to wash-sale rules.

Active ETFs also offer a structural advantage over passive alternatives when replacing underperforming positions. By substituting a losing mutual fund or passive ETF with an active ETF, investors can retain market exposure while benefiting from the latter's tax-optimized structure. This dynamic is particularly relevant in 2026, as market volatility and interest rate uncertainty amplify the need for agile, tax-aware strategies.

The 2026 Opportunity: Balancing Growth and Tax Efficiency

As 2026 approaches, the strategic value of active ETFs lies in their ability to harmonize growth objectives with tax optimization. While passive ETFs remain the gold standard for tax efficiency- averaging 0.78% capital gains distributions in 2022-active ETFs are closing the gap through innovation. Their ability to outperform benchmarks while minimizing taxable events makes them ideal for taxable accounts, where after-tax returns are paramount.

For investors, the urgency is clear: 2025's $378 billion inflows into active ETFs signal a paradigm shift. Funds like XCHG, with their institutional-grade tax strategies, position investors to navigate 2026's uncertainties with both growth potential and fiscal discipline. As tax-loss harvesting becomes more sophisticated, active ETFs will likely play an even greater role in shaping after-tax returns-a trend that demands immediate attention for those seeking a competitive edge.