Key Takeaways
- Active ETFs have steadily increased their inflows with more diverse fund options entering the market.
- Active fund management via ETFs gives investors the benefits of the ETF structure while gaining tax efficiency and keeping costs low.
- Key factors to consider before investing in active ETFs are the thesis behind management decisions and historical performance compared to industry benchmarks.
510 new active exchange-traded funds (ETFs) launched in 2024, helping active ETFs overall contribute to more than 25% of the $1+ trillion in ETF inflows (approximately $293B). As of February 2025, global active ETF assets hit a new record high of $1.3 trillion, and in the U.S., assets hit $956 billion.
It’s no wonder that active ETFs are making headlines.
For decades, passive investing has been the go-to for industry experts and retail investors. The easy-to-understand system of investing and extraordinarily low costs made it a no-brainer method to capitalize on the whole market or different sectors.
However, actively-managed ETFs are making strides and offering a different path to wealth and investment returns.
A Unique Fusion of Benefits
Active ETFs offer investors access to the benefits of active management plus the advantages of the ETF structure.
Active ETFs are managed by professional investment teams that use an investment thesis to drive their management decisions. They conduct in-depth research and dynamically adjust holdings at regular intervals (often quarterly) with the aim to outperform a specific benchmark. For instance, Langar’s HealthTech ETF is actively managed and rebalanced quarterly by adding, removing, or adjusting the weights of companies within the fund to improve returns compared to other legacy healthcare ETFs.
At the same time, investors can take advantage of key ETF features, such as intraday trading and potentially lower costs compared to traditional mutual funds. In addition, the ETF structure enables greater tax efficiency due to the in-kind creation and redemption process, which helps minimize capital gains distributions. This makes active ETFs a tax-efficient choice for investors in taxable accounts.
This combination makes active ETFs an attractive choice for investors who seek flexibility, transparency, and professional oversight in their portfolios in order to maximize returns and minimize tax implications.
An Efficient Portfolio Management Tool
Thanks to their distinctive features, active ETFs can be added to any portfolio as an efficient complement to an investor’s existing asset allocation.
For instance, investors whose portfolios primarily consist of passive index ETFs may use active ETFs to enhance performance by capitalizing on market inefficiencies. Skilled portfolio managers of active ETFs can make tactical adjustments based on market conditions, economic trends, and emerging opportunities. This flexibility can help mitigate downside risks and improve risk-adjusted returns.
This ETF class also provides a simple way to diversify a portfolio through investing in thematic, industry-focused funds that may be underrepresented in broad index funds. These funds may often be seen as risky, but with a portfolio manager at the helm, they can help maximize returns.
One of the Fast-Growing ETF Options
The active ETF market has seen explosive growth in recent years, as mentioned above, and continues to break records in 2025. A key driver of this expansion has been the rise of unique ETF structures, such as derivative-income funds and buffer ETFs. These innovative products provide investors with alternative income streams and downside protection, addressing common concerns in volatile markets.
For instance, buffer ETFs are designed to cap potential losses but also potential gains. As an example, consider a buffer ETF that buffers up to 10% losses and caps at 15% gains. If the market declines by less than 10%, your ETF does not take a loss; above a 10% decline, your loss is capped at 10%. If the market goes up <15%, you capture all the gains; above 15%, and you’re capped at 15% gains.
Similarly, derivative-income ETFs may seek to provide leveraged or inverse exposure, manage risk, hedge a particular asset or security, or implement specific investment strategies, appealing to those seeking consistent cash flow.
An Example of Active vs. Passive ETFs
Consider a basic comparison of active vs. passive funds during a market downturn. (Figure 1).
This graphic illustrates how active ETFs offer downside protection due to the ability to reallocate assets within a fund at the appropriate time, resulting in less severe losses. Fund managers can reinvest in undervalued companies through the same actively-managed approach, thus increasing the chances of a faster recovery.
It’s important to remember that passive funds may also follow reallocation rules to maintain company weights, however, those rules are fixed (e.g., fund reassessment may occur only at certain times of year and allow for only a certain percentage of reallocation). With actively-managed funds, the rules become flexible, with management and asset allocation at the discretion of the fund management team as dictated by their investment thesis.
Considerations Before Investing in Active ETFs
While active ETFs offer numerous benefits, investors should perform due diligence and evaluate key factors before incorporating them into their portfolios:
Expense Ratios: Although generally lower than traditional mutual funds, active ETFs may have higher costs than passive ETFs and index funds. It’s essential to compare expenses to potential benefits before investing.
Performance History: Understand who manages the fund and assess the track record and strategy to determine if the active approach has outperformed its benchmark. In the current era of AI-supported technology, there is the possibility that fund management is being conducted by AI software rather than an actual person. Regarding performance, consider reviewing whether fund performance has been better during key periods, e.g., if legacy benchmarks take a hit, does your active ETF also decline, or does it perform better? This question is especially important with thematic funds focused on underrepresented industries.
Investment Strategy: Ensure that an ETF’s strategy aligns with your risk tolerance and financial goals. Research the fund’s investment thesis and note which parameters are used to determine inclusion into the fund, and how often rebalancing occurs.
The Future of Active ETFs
The rise of active ETFs reflects a broader shift in investor preferences toward more dynamic investment vehicles that can improve diversification and maximize returns, yet remain cost-effective and tax-efficient. As more asset managers enter the space and introduce innovative strategies, investors can expect an even broader selection of active ETFs catering to various market conditions and investment objectives.
Sanjana Vig MD, MBA
Dr. Vig is a co-founder and Chief Marketing Officer of Langar Holdings. She is a board-certified anesthesiologist specializing in Perioperative Management. She is also the founder The Female Professional, a website geared toward empowering professional women in life and their careers.
