All aboard the active ETF train!

Financial advisors are getting active. And no, we’re not talking about a new health craze taking over the wealth management industry.  

It’s actually an old investing idea that says markets can indeed be beaten, and investors won’t skimp on trying to do it.  

That’s right, everybody on Wall Street is doing the active ETF, and the good times are only getting started. 

A report released by Bloomberg Intelligence this summer showed roughly 51 percent of the nearly 4,300 US-listed exchange-traded funds are overseen by fund managers who have more discretion to pick stocks or other securities, eclipsing index-following products for the first time. The Bloomberg data also revealed the number of active ETFs has more than doubled in the past five years, from just 23 percent in 2020.  

Active ETF assets AUM reached $1.21 trillion in July 2025, according to JP Morgan Asset Management. Active ETFs absorbed a record share of the nearly $462 billion sent to ETFs in 2025 through July. At year-end 2024, equity, bond, and hybrid mutual funds had total net assets of $21.7 trillion, and ETFs, active and passive, posted assets of $10.3 trillion. BlackRock forecasts global active ETF AUM to reach $4 trillion by 2030. 

Since active ETFs are generally more costly than traditional passive ETFs, one would think their attractiveness would be limited. Active ETFs, particularly those with complex strategies, often sport expense ratios of 0.75 percent or higher, compared to passive ETFs, which can have expense ratios as low as 0.10 percent or even less. 

That clearly has not been the case, though. The difference in cost has not held back supply – or demand – for active ETFs, which were introduced in 2008, almost two decades after the first passive ETFs hit the market. It admittedly took a while for active ETFs to pick up market traction, with the big turning point being a slew of regulatory advances in 2019. 

Now that active ETFs have the market’s imagination and regulators’ blessing, however, financial advisors like Corey Voorman, president and founder of Voorman Investment Counsel, are finding more and more uses for them in client portfolios.  

“Investors in active ETFs may be able to avoid certain capital gains distributions sometimes caused by redemptions, that a similar offering in a mutual fund wrapper may generate. A simple analogy comparing an active mutual fund offering versus a similar active ETF offering is an ice-cream analogy. Would you prefer your ice cream in a waffle cone or a bowl with a spoon? It’s the same ice cream held by each, but a moderately different and important distinction in the end presentation,” Voorman says. 

We all scream for active ETFs

The tax advantages of the ETF wrapper, passive or active, are well known by now, and are the reason why ETFs have steadily chipped away at the once-indomitable mutual fund market.  

But there’s more to the story than tax efficiency when it comes to active ETFs, according to Andrew Moss, founder and managing partner at Fortage Capital Advisors, an Elevation Point partner firm.  

“There are now active ETFs that closely track separately managed accounts (SMAs), and these SMAs have minimums greater than funds available in accounts within larger households. So, it is a great way to get exposure to a manager without having enough funds to meet the manager minimums,” Moss says. 

Moss adds that some clients also prefer the simplicity of active ETFs when it comes to reporting.  

“They do not like seeing pages of individual holdings in an SMA. The active ETF is just one line item on the screen or statement,” Moss says. 

Timothy Kenney, founder and financial advisor at Seawise Financial, has also started incorporating active ETFs into client portfolios, but only in certain areas. He generally avoids active ETFs in the US large-cap-equity space, where the market is highly efficient and low-cost indexing works well. But in fixed income, where there’s less transparency and more room for skilled managers to add value, Kenney says he is more open to using active ETFs.  

“In those cases, the flexibility to go beyond the benchmark, into areas like high yield or emerging markets, can enhance risk-adjusted returns,” Kenney says. 

Similarly, Sue Gardiner, founder of South County Wealth Planning, follows a disciplined, passive approach for the core of her client portfolios. That said, the growth in active ETFs has opened up opportunities for her to use more targeted exposure and risk management depending on client preferences.  

For example, she can use an active ETF for a portion of the small-cap portfolio because the underlying firms are more sensitive to interest rate changes. And for some of her clients who want to be more values-oriented, she might include a values-focused ETF, like a women’s empowerment-focused fund. 

When to go passive - and cheaper

One of the original selling points of traditional passive ETFs was their low cost. The skeptical among us may claim that the introduction of active ETFs was Wall Street’s clever maneuver to get some of those lost fees back. 

Without wading too deep into that debate, financial advisors do say there are times when it makes sense to opt for a cheaper, passive ETF over an active one – and vice versa. Put simply, they like the flexibility of having both at their disposal, and ultimately it comes down to client goals, tax positioning, and risk management.  

“We opt for passive ETFs when seeking low-cost exposure to highly efficient markets, like US large-cap equities, whereas active managers often struggle to consistently outperform. However, we will substitute active ETFs when the cost premium is justified by downside protection, income generation, or access to niche strategies,” says Bryan Bibbo, president and CFO at JL Smith Holistic Wealth Management. 

Emphasizes Bibbo: “We view active and passive ETFs as complementary tools rather than an either-or choice.”  

Seawise Financial’s Kenney, meanwhile, maintains “cost is always a factor.” And in efficient markets like US large-cap or developed international equities, he sticks with low-cost passive ETFs.  

“We’re not in the business of paying more for active management where it doesn’t consistently deliver. That said, we’ll consider swapping a passive ETF for an active one if we believe the asset class is one where indexing falls short – like certain segments of fixed income or more nuanced thematic exposures. It goes both ways. We’ve also replaced active funds with passive ETFs when the results didn’t justify the higher cost,” Kenney says.  

Checking under the active-ETF hood

Generating alpha is not paramount or even relevant when it comes to passive ETFs. That’s by definition: you can’t beat the benchmark when you are the benchmark.   

Performance is, however, a major motivation for wealth managers on the active ETF side. That’s why Wayne McCormick, wealth advisor and managing director at McCormick Wealth Management at Steward Partners, is careful to research and select active ETFs from fund managers he already has experience with, and he understands their philosophy.   

“We’re not interested in being the guinea pig and testing a new fund with our client’s portfolios, no matter how impressive the story is. So, the first round of inquiries goes to those firms who already invest in the space we’re looking at but have introduced an active ETF complement to a long-standing and tested mutual fund,” McCormick says, adding that “extra credit” goes to those firms where the management team is the same in both the mutual fund and active ETF versions.   

Fortage’s Moss also prefers to go with larger more experienced operators, as their ETFs are more actively traded.  

“I prefer to use ETF operators whose investment philosophy and processes we have researched and understood over time. Our familiarity with a manager’s approach helps us determine if a particular solution is appropriate for our clients,” Moss says. 

Since some of these active ETFs are new, Kenney looks to see if the manager has a track record in a comparable 40 Act fund. He also likes to check the underlying liquidity of newer funds. 

“We want to make sure that there’s enough AUM in the strategy and look at things like bid/ask spreads to ensure the fund can handle larger buy and sell orders,” Kenney says.  

Meanwhile, South County Wealth Planning’s Gardiner uses Morningstar to review manager tenure, risk-adjusted returns, cost, and performance. She also looks at the underlying holdings to “ensure the fund is doing what it says it’s doing and that it’s not overlapping too much with our passive core.”