ETF trends to watch in 2025: All active/ non-index ETFs, all the time

ETF trends to watch in 2025: All active/ non-index ETFs, all the time

I promise that my initial plan was not for this annual prediction column to hit your inbox in February as it did last year. However, considering how much grief I’ve gotten over the Detroit Lions flaming out in the NFL playoffs, a slight delay to reflect and recover seemed more than reasonable to me. I am also skipping the non-ETF predictions this year although I would have absolutely nailed the Grammys!?? ?

This is my ninth year of giving ETF-related predictions. In general, I usually have one good prediction, one terrible prediction, and one that is somewhere in the middle. Call it the Goldilocks approach to prognosticating. This year, I’m going to try something a little different by focusing (and making multiple predictions) on one specific topic. ?

I’ve been thinking a lot about the rise of active ETFs in the United States, which last year accounted for 78% of new fund launches and 27% of net inflows.[1] I often reference the impact of the Securities and Exchange Commission’s rule 6c-11 (the “ETF Rule” of 2019) as it provided a consistent regulatory framework and made no operational distinction between active and passive funds. For investors who prefer the ETF wrapper, all investment options across the active/passive spectrum are possible, many of which now have track records of more than three years. However, I would argue that one of the lesser-known reasons that these strategies are rising is that the definition of “active” has evolved alongside the acceleration in ETF adoption. Bear with me here for a second.

Approximately a decade ago, many ETF asset managers (including Franklin Templeton) launched indexed strategies that went beyond market capitalization methodologies. Often referred to as “smart beta ,” “multifactor,” or even “enhanced index,” their underlying indexes were constructed using various tilts, screens, or optimization frameworks to deliver an expanded set of outcomes. One of the unintended consequences of this type of fund was that a nomenclature split formed between the terms “passive” and “index.” Some investors considered passive to be synonymous with index. But I would argue just as many held the belief that passive meant only broad market, capitalization-weighted indexes.

How do active ETFs fit into all this? I’d argue that most investors consider “passive” to be the opposite of “active.” That is certainly the case when researching the ETF universe. Put another way, I think most investors think:

??????????????????????????????? Passive ETFs + Active ETFs = All ETFs

But that math works only for investors who think passive is the same as index. In my opinion, things have evolved. A better and more accurate formula would be:

??????????????????????????????? Index ETFs + Non-Index ETFs = All ETFs

And according to this logic, “active” would mean “non-index.” For those of you who’ve stuck with me this far, I cannot stress enough the importance of this differentiation. Active does NOT entail a specific risk budget or tracking error or information ratio. It simply refers to a fund that is not mandated to track an underlying index. Intuitively, this makes a ton of sense to me as there are plenty of non-market-cap index ETFs that have a greater tracking error than benchmark-aware active strategies.

The big takeaway is that many investors love the ETF wrapper and now understand that specific outcomes can be accomplished regardless of management style. Taking that a step further, if the index fund and the non-index fund have a very similar philosophy, there is an argument to go with the ETF that has the flexibility to adjust the portfolio beyond the couple times a year in which the index rebalances. Currently, the world has decided to call these “active ETFs” rather than “non-index ETFs.” Potato, pot-ah-to. Tomato, tom-ah-to. Let’s call the whole thing ETF.

My predictions:

1)????? Active ETF AUM will hit $1.5 trillion in the United States this year.

2)????? There will be more active ETFs than index ETFs in the United States.

3)????? Active fixed income ETFs will reach 50% of all active net inflows.

I hope everyone has a wonderful 2025!

There is no assurance that any estimate, forecast or projection will be realized.

?

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Equity securities are subject to price fluctuation and possible loss of principal.

ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.?

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested.?Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data.? Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S.?by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.


[1] Source: Bloomberg.

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