How active ETFs can help investors fine-tune portfolio construction

Actively managed exchange-traded funds are on the rise. In the short time since their debut in 2008, active ETFs have already topped $1 trillion in assets under management.¹ This expansion has been driven by demand from investors attracted by active ETFs’ fusion of active management with the benefits of the ETF wrapper, which makes these funds a powerful portfolio-management tool.

The “active” in active ETF means these funds are managed by investment professionals with specific goals, which can include outperforming a benchmark, generating income and targeting a specific investment theme. The “ETF” tells you they offer the same advantages as all exchange-traded funds. They can be bought and sold at a known price on an exchange, just like stocks. They can be cost-effective and offer greater transparency on holdings.

This combination of attributes can make active ETFs a valuable addition to an investment portfolio. They offer investors an efficient, flexible way to gain exposure to equity and fixed income markets, including corners of these markets where structural inefficiencies make specialist research and rigorous bottom-up security selection essential, in our view. Innovative products such as derivative-income and buffer ETFs can allow investors to manage volatility while generating income.

We believe the active ETF market will continue to expand in the years ahead, and that the active component of these funds will be critical in driving market growth. The focus on delivering specific investment outcomes will intensify. This will result in a broadening range of targeted products offering access to new markets and asset classes and providing investors with increasingly sophisticated tools for portfolio construction and management.

The rise of active ETFs

Active ETFs grew slowly in the years following the first fund launch 17 years ago, but that changed in 2019, when the US Securities and Exchange Commission streamlined the process for bringing new ETFs to market.² Among other changes, the so-called ETF Rule allowed for the use of custom baskets of assets. This gave managers greater flexibility to manage a fund’s underlying portfolio and liquidity, a crucial change that facilitated the development of active ETFs.

ETFs have been around for more than three decades, and during most of that time they have been associated primarily with passive investing and index-tracking funds. That is changing. Active ETFs accounted for just 7.8% of all ETF assets at the end of 2024, but they grew almost five times faster than their passive peers, fuelled by a surge in global net inflows to $339 billion.³

Actively managed ETFs are on the rise, fuelled by a surge in global investor demand

Source: Morningstar, Goldman Sachs Asset Management. As of December 31, 2024.

Enhancing portfolio diversity and efficiency

For investors who are familiar with active investing through mutual funds, active ETFs deliver many of the same potential benefits, such as in-depth research and dynamic management with the goal of outperforming a benchmark. In addition, they offer the advantages of the ETF vehicle, including intraday trading, portfolio diversification and the potential for lower costs.

For investors who are familiar with ETFs as a passive strategy through index-tracking and rules-based funds, active ETFs offer access to the alpha potential, robust security selection and engagement with portfolio companies that an active manager can bring, without sacrificing the benefits of the ETF vehicle.

Thanks to this unique combination of attributes, active ETFs can provide an efficient complement to existing allocations that allows investors to diversify their portfolios. The solutions they offer may help investors who are seeking to manage market volatility and also outperform the market. Active security selection can allow investors to avoid the concentration issues facing many passive investment products that track indices whose performance is driven by a small percentage of stocks.

The ease of buying and selling an active ETF makes these products efficient tools for short-term and tactical investments. This could benefit an investor who has committed to a private equity investment, for example. While they wait for their capital to be called and deployed, the investor could put it to work through an active ETF and sell the exposure quickly when their capital is called.

Active ETFs could also be a versatile component of a model portfolio, which provides a framework for pursuing an investor’s objectives as they evolve over time. As part of a diversified asset allocation that balances risk and return, active ETFs may also be used to expand an investor’s investment options. For example, derivative-income ETFs provide the potential to generate income from equity markets that is independent of the interest-rate movements that impact yield in fixed income.

Industry trends to watch

We expect ETFs to build on a record-setting 2024, when flows, assets under management and fund launches all posted significant gains. We anticipate these trends may continue in the years ahead as ETFs become the pooled vehicle of choice for many investors thanks to their ease of trading, transparency and cost-effectiveness.

We are watching three key trends that investors should be aware of. Active ETFs have become the fastest-growing part of the industry, and we see further expansion ahead. The market is dominated by US-listed funds, though investor demand in the rest of the world is increasing.⁴ In Europe, assets in active ETFs rose sharply last year to $56.7 billion.⁵

We think solutions-oriented ETFs are particularly well positioned for further development. We also expect to see the increased incorporation of ETFs, especially active ETFs, in model portfolios that many investors rely on to provide a road map toward their chosen investing destination.

The importance of active management

With new uncertainties around inflation, growth and international trade arising, in our view, investors have reasons to recalibrate their portfolios, and an active investment approach, diversification and sound risk management will be essential. The rise of active ETFs offers investors a flexible and efficient tool to diversify their portfolios and prepare them to take advantage of the potential opportunities that lie ahead.

Notes

¹ Global assets under management in active ETFs rose to $1.075 trillion at end-2024 from $669 billion a year earlier. See “Global ETF Flows 2025,” Morningstar. Data as of December 31, 2024.
² “SEC Adopts New Rule to Modernize Regulation of Exchange-Traded Funds,” SEC press release. As of September 26, 2019.
³ “Global ETF Flows 2025,” Morningstar. Data as of December 31, 2024.
⁴ “Global ETF Flows 2025,” Morningstar. Data as of December 31, 2024.
⁵ European ETF & ETC Asset Flows: Q4 2024,” Morningstar Manager Research. Data as of December 31, 2024. The USD figure given here is a conversion of EUR 54.4 billion in the Morningstar report as of December 31, 2024.

Risk considerations and disclosures

Exchange-Traded Funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed, or sold, may be worth more or less than their original cost. ETFs may yield investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched.

Diversification does not protect an investor from market risk and does not ensure a profit.

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Date of first use: September 25, 2025