The fastest-growing product in capital markets of late hasn’t been AI or even crypto. It’s actively managed exchange-traded funds.
Like a mutual fund, an active ETF is run by a portfolio manager who chooses stocks or bonds that fit a common theme like growth or value, or a particular industry like information technology or health care.
The appeal of ETFs is that, unlike mutual funds, investors can instantly buy shares in a fund that is listed on an exchange and sell them at will. What’s more, fees are lower – typically by 30 to 40 basis points, according to Morningstar. And an active ETF’s holdings can be seen at the end of every trading day, whereas mutual funds only have to disclose quarterly.
This fresh take on investing looks increasingly attractive amid market turbulence and unpredictability. “Nobody wants to give over their cash and think they will only look at it on a quarterly basis,” says Vinod Jain, founder of research and advisory firm Adkrest. “They want to know if their money is safe.”
Christopher Murphy, T. Rowe Price
ETFs were passively managed, mimicking indexes like the S&P 500 or Russell 1000 Index of small-cap stocks, from their first listing on stock exchanges in 1993 until 2008, when Bear Stearns (subsequently acquired by JPMorgan) issued the first active ETF in the throes of the global financial crisis.
One of the crusades you could say that we’re on is breaking the stigma that ETF means passive and mutual fund means active,” says Christopher Murphy, head of ETF specialists at T. Rowe Price, which launched four active ETFs in 2000, five in 2023, and another 13 in 2025.
Launches in the U.S. were at a fever pitch last year. Asset management firms including State Street, T. Rowe Price and BlackRock introduced nearly 1,000 active ETFs, almost doubling 2024’s 584, according to Morningstar. That compared with a total of 150 passive ETFs in 2025.
“Constituting over 83% of U.S. ETF launches in 2025,” says a Cboe Global Markets review, “active ETFs are redefining measures of success beyond benchmark attribution – instead focusing on how fund mandates are addressing target clients’ risk requirements and performance goals. Active mandates continue to accumulate interest across client segments as allocators choose these ETFs not only for their tailored investment mandates, but as alternatives to other distribution channels such as structured notes and annuities.”
As of December 31, there were about 2,800 active ETFs and 3,500 passive ETFs listed on exchanges in the U.S. The active ETFs received about $475 billion in deposits, or about a third of the new money that flowed into all ETFs last year.
The active ETF trend is fueled by a desire among both investors and fund managers to manage risks at a time when many analysts are predicting a relatively near-term market downturn. While investors take comfort in the daily disclosure of assets in active ETFs, the managers of those funds see that feature as presenting a risk in itself – that competitors will buy the same stocks and sell them quickly for a profit, which would drive down the value of the active ETFs’ holdings.
This “front-running” investment strategy is exactly what active mutual fund managers have sought to guard against with their less frequent portfolio disclosures. This risk has discouraged many fund managers from offering active ETFs because it involved cloning their own mutual funds. Because they owned the same securities, the fear was that the mutual funds’ value could get dragged down in the fray.
Stephen Welch, Morningstar
“Everybody was afraid of giving up their secret sauce,” says Morningstar Research Services analyst Stephen Welch.
That’s why some early active ETFs, like T. Rowe Price’s in 2000, disclosed their holdings quarterly, thus earning the monicker “semi-transparent.” They were named after the mutual funds that they were marketed as having cloned, like the T. Rowe Price Blue Chip Growth ETF (TCHP), which was named after the Blue Chip Growth Fund (TRBCX).
“If there's an ETF out there that tracks a mutual fund, and it’s fully transparent, I would view that as a risk,” says T. Rowe’s Murphy. “We wanted to protect our shareholders from those risks.”
To circumvent the risk while still disclosing active ETFs’ assets every day, “a lot of managers have gotten away from offering an identical clone to their mutual fund. So they might be combining two mutual funds together in an active ETF wrapper,” says Morningstar’s Welch. “Typically, you’re seeing a sibling-type strategy where they can kind of hide some of the traits that they want to.”
Of course, this tactic exposes investors to a new risk that they may be unaware of. Believing they have discovered a low-cost, fully transparent twin of a high-flying mutual fund, they may soon learn the hard way that the main similarity was a blue-chip name.
For example, the J.P. Morgan Active Growth ETF (JGRO), launched on August 8, 2022, is what Welch calls “a 50/50 split” between the J.P. Morgan Growth Advantage Fund (VHIAX – launched October 29, 1999) and the J.P. Morgan Large Cap Growth Fund (OLGAX – February 22, 1994).
A comparison of fact sheets shows that the active ETF performed differently from the two mutual funds last year. While the three largest holdings in each fund are Apple, Microsoft and Nvidia, those names’ percentages of the respective portfolios’ assets differ:
-- In the J.P. Morgan Active Growth ETF, which delivered a total return of 14.67% during calendar year 2025, Nvidia represented 12.0% of total assets, Microsoft 8.8% and Apple 7.8% on December 31. The ETF has a total of 107 holdings.
-- In the J.P. Morgan Growth Advantage Fund, which has 79 holdings and returned 15.52% in 2025, Nvidia was at 11.0%, Apple 8.0% and Microsoft 7.9%.
-- In the J.P. Morgan Large Cap Growth Fund, with 76 holdings and a 2025 total return of 13.83%, Nvidia comprised 13.1%, Microsoft 9.6%, and Apple 7.5%.
Despite such disparities, investors may gravitate toward active ETFs because the fees are lower than those of actively managed mutual funds, which historically have not outperformed index funds over time. The net expense ratio for the J.P. Morgan Active Growth ETF, 0.440%, is less than half the 0.990% for the J.P. Morgan Growth Advantage Fund and 0.940% for the J.P. Morgan Large Cap Growth Fund.
Expense ratio comparison for the Vanguard Wellington U.S. Value Active ETF (VUSV).
Another feature of active ETFs that puts investors at ease is a tax advantage. Enacted in 2019, SEC Rule 6c-11 allows active ETFs to sell outsize holdings – like Apple shares, which have multiplied in value by 10 times in 10 years, from $26.46 to $264.48 – without paying capital gains tax, Adkrest’s Jain points out.
This year will show just how much of an appetite there is for the active products. After the record-breaking creation of active ETFs in 2025, the market could well be saturated. Last year, 146 active ETFs shuttered, according to Morningstar; 114 were liquidated and 32 merged.
Welch expects the number of active ETFs to come down. Among the first to close, he predicts, will be smaller, niche ETFs that specialize in strategies like double leverage, with less than $100 million in assets. “If they don't take assets, they're going to have to close.” Then they would likely cede territory to some of the 6,300 mutual funds in the U.S. (as of December 31).