Active management is getting a fresh look from many investors, financial planners, and institutional investors for their portfolios as the number of active ETFs launched has continued to rise. The ETF structure enhances many of the wins of active management, including lower hurdles, reduced cash drag, and tax advantages. These wins have been realized across a variety of asset classes, including emerging market equities, bonds, and commodities.
And now, they may want to add large-cap growth stocks to the list.
Surprisingly, active managers within the growth space have been chronic underperformers despite tech’s ascendancy into prime time. But now, with ETFs adding significant tailwinds, active growth is back with a vengeance. For investors, it’s another sign that active ETFs can only serve to enhance a portfolio.
Long-Term Underperformance
Growth stocks are basically defined as firms that are anticipated to grow, usually via revenues, at a rate significantly above the average growth for the market or their sector. So, if stock XYZ is expected to see revenue growth of 20% per year and the broader S&P 500 is only expected to see about 5%, then the stock would be considered a growth stock. Some more mature firms are seen as growth stocks because they can generate their profits at a faster rate than the overall market.
And given this faster pace of revenue generation, historically, growth stocks have fallen within the industries of technology, healthcare, and consumer discretionary. Given the eye-popping returns of these sectors over the last few decades, it’s hard to believe managers focusing on growth would underperform their benchmarks. But that’s been the case.
LPL Financial sheds some light on the underperformance and just how pervasive it has been. According to the financial network and FactSet data, over the last 10 years, the number of active managers within the growth space outperforming the Russell 1000 Growth index is only 10%. Looking at shorter periods, LPL also found that most active managers trailed their benchmarks for the one-, three-, and five-year timeframes. This chart from the firm’s study shows the underperformance. 1
Source: LPL Financial
The reasons for the underperformance may come down to two words: Magnificent Seven.
According to MSCI, many growth managers have had underweight positions in the Magnificent Seven stocks of Apple (AAPL), Nvidia (NVDA), Meta Platforms (META), Amazon (AMZN), Alphabet (GOOG), Microsoft (MSFT), and Tesla (TSLA), relative to their benchmarks over the last decade. That’s been an issue for many active managers. These stocks have been the main drivers of the returns for not only growth stocks, but the stock market as well.
For example, MSCI’s data showed that the Magnificent Seven’s weighting in the MSCI USA Index has gone from 7% to 27% in roughly a decade. As for the MSCI USA Large Cap Growth Index, those seven firms now make up 55% of the index. It is called the ‘Burden of a Bull Market.’ Many active managers have owned other securities besides these seven stocks, and the pull of this group has been so great that it’s been impossible to beat benchmarks. That has led to underperformance.
A Switch Is Brewing?
The last column on LPL’s chart is interesting. Over the last year, more than 72% of active growth managers have managed to beat their benchmark. The reasons are four-fold, but they underscore the ability of active management to not look like an index.
Because many active managers seek to reduce the overall risk of their portfolios, they show underperformance in up markets, but outperformance in down markets. And right now, growth appears to be in a down market.
Investors have started to sour on the Magnificent Seven as growth concerns have weighed on the global economy. This has switched gains into losses. The 10 largest holdings in the Russell 1000 Growth Index—which account for 59% of the index—managed to produce a 29.3% return for the trailing one-year period. However, so far in 2025, these stocks have managed to produce a negative 4.7% return. That has the top 10 underperforming the overall index. Most active growth managers are playing in the sandbox in the other 40% of the index’s holdings.
Second, there has been a change in the leadership of the sector. LPL data shows that the strongest performing sectors within the Russell 1000 Growth Index were communication services, consumer discretionary, and information technology. These sectors have increased their market caps and gained more prominence in the index. However, these days, the winners have been the energy, healthcare, and consumer staples equities within the index.
Finally, there has been a shift toward defensive sectors and less risk overall. Equities with at least 1.5 betas—or those with at least 50% more risk than the overall market—were richly rewarded in years prior. However, these stocks have switched to underperforming as investors look toward defensive stocks. This has rewarded many active growth managers who historically don’t hold such high-beta stocks in similar concentrations as broader indexes.
The result is that active managers in the growth sector have been able to navigate the market shifts and start to outperform their passive benchmarks once again.
Time for Active Growth ETFs
For investors looking to add a touch of growth to their portfolios, the recent switch toward the outperformance of active growth strategies could be a major wake-up call. Ultimately, it was the active attributes that managed to save the day and provide the needed gains to help beat passive benchmarks. The best part is that ETFs help enhance this fact further on taxes and lower costs. Both factors help drive further outperformance versus indexes, creating lower fees to hurdle and limiting capital gains taxes.
And if the leadership changes, growth concerns, and other issues continue to hit the largest constituents of the index, active growth managers and their ETFs will be able to keep the benchmark outperformance going. That means it may be time to retire the passive ETF and add an active one. Or at a bare minimum, split your holdings between the two. In the end, that could provide just enough ‘oomph’ to beat benchmarks for the long haul.
Active Large-Cap Growth ETFs
These ETFs were selected based on their ability to harness growth stocks with an active management style. They are sorted by their YTD total return, which ranges from -7% to 4%. They have AUM between $1B and $23B and have expenses between 0.12% and 0.60%. They are currently yielding between 0% and 10.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| NUGO | Nuveen Growth Opportunities ETF | $2.87B | 4% | 0% | 0.56% | ETF | Yes |
| JEPQ | JPMorgan Nasdaq Equity Premium Income ETF | $23.4B | -1.8% | 10.7% | 0.35% | ETF | Yes |
| DFAU | Dimensional US Core Equity Market ETF | $7.41B | -2% | 0.9% | 0.12% | ETF | Yes |
| CGGR | Capital Group Growth ETF | $10.4B | -2.3% | 0.4% | 0.39% | ETF | Yes |
| TCHP | T. Rowe Price Blue Chip Growth ETF | $1.06B | -4.4% | 0% | 0.57% | ETF | Yes |
| FBCG | Fidelity Blue Chip Growth ETF | $3.98B | -7% | 0.5% | 0.60% | ETF | Yes |
In the end, active managers in the growth space have started to regain their mojo. That makes many of the active ETFs on the market within the investing style a big buy. As market leadership continues to shift and risk isn’t being rewarded anymore, active ETFs should be able to win out over their passive peers for the long haul.
The Bottom Line
Active ETFs have been great vehicles for growth managers over the last year or so. With passive benchmarks starting to underperform, active managers in the growth style have started to win, and the trend looks to continue.
1 LPL (March 2025). Call It a Comeback? Active Large Growth Funds Get a Boost
