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.

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[1] Source: Bloomberg.