Active ETFs surpass $1 trillion as investor interest rises

In 2024, assets under management for active exchange-traded funds (ETFs) exceeded $1 trillion for the first time, according to data from Morningstar. This remarkable milestone reflects a significant shift in investor behavior towards actively managed funds, which are designed to outperform the market through selective asset management. Although passive ETFs remain prevalent, the momentum towards active management has gained speed due to rule changes by the U.S. Securities and Exchange Commission in 2019, facilitating the launch of active ETFs without needing an exemptive order. The United States remains the foremost market for active ETFs, accounting for a substantial portion of global assets. Morningstar noted that the growth rate of active ETFs was five times greater than that of their passive counterparts last year, with the share of active ETFs rising to 7.8% of all ETFs in 2024, up from 6.2% the previous year. Much of this growth has been attributed to increasing investor confidence in active management, particularly in volatile market conditions, where active strategies are perceived to offer more adaptability and potential for higher returns. Industry experts, including Roxanna Islam, head of sector and industry research at TMX VettaFi, have indicated that while equity ETFs will likely continue to dominate the active ETF landscape, there is a growing expectation that fixed income strategies will increasingly capture investor interest. This is especially pertinent as market conditions evolve, creating potential demand for active strategies that focus on specific bond durations or qualities. However, the rise of active ETFs faces challenges outside the U.S. The active ETF space remains limited in many countries, largely due to higher management costs compared to passive strategies and less developed Registered Investment Advisor (RIA) frameworks. In the U.S., RIAs have been pivotal in driving the adoption of active ETFs, representing about 41% of all active ETF assets, highlighting the importance of advisory services in this emergent investment sector.