What are active ETFs and how are they reshaping how Americans invest?

Investors are flocking to actively managed exchange-traded funds (ETFs) and recently pushed the amount of assets in the investment class above a notable milestone.

Actively managed ETFs surpassed $1 trillion in assets under management in the U.S., as investors look to find investment options that may outperform passive ETFs that track an index.

“Active ETFs are exploding because investors want the best of both worlds, Wall Street strategy with Main Street pricing,” Ted Jenkin, managing partner for Exit Wealth Advisors, told FOX Business. “You’re getting flexibility to navigate volatile markets, potential tax efficiency, and in many cases a real shot at outperforming the index instead of just riding a mutual fund.”

The ETF market has grown across both actively and passively managed ETFs, but the two types have important distinctions.

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While passively managed ETFs are designed to track a benchmark such as the S&P 500, actively managed ETFs aim to outperform a given benchmark by having the portfolio manager adjust the investments within the ETF based on research or strategies they’re utilizing.

“Both approaches serve an important role for retail investors – the difference comes down to intent,” Charles La Rosa, vice president and head of ETFs at Gabelli Funds, told FOX Business. 

“Active ETFs seek to provide thoughtful security selection, risk management and potentially differentiated outcomes, particularly during periods of volatility or in less efficient areas of the market,” La Rosa said.

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Fidelity Investments said that there are two types of actively managed ETFs that differ in how they disclose their holdings. 

Traditional actively managed ETFs, as well as passive ETFs, disclose their holdings on a daily basis, whereas semi-transparent active ETFs disclose their holdings on a quarterly basis.

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Research from the Securities and Exchange Commission’s (SEC) Division of Economic and Risk Analysis noted that last year, as active ETFs surpassed the $900 billion level, passive ETFs had over $8 trillion in total net assets.

The SEC’s research also notes that active ETFs had higher expense ratios than their passive peers, with asset-weighted passive ETF having operating expenses at 0.12% of net assets versus 0.49% for active ETFs as of 2024. 

Equal weighted ETFs in both categories had higher expenses, with passive ETFs at 0.45% and active ETFs at 0.70%.