Arguably, one of the biggest “fights” in asset management has to be the battle between passive and active management. Thanks to decades worth of historical data, stronger returns, and lower costs, passive and index investing has long taken the lead in this race, with many active strategies taking a distant second place. With that, billions of dollars have followed in index funds over the last decade or so.
However, that was before the advent of active ETFs.
And now, active ETFs may have the last laugh. With volatility rising and valuations getting stretched, it might be time for active management to shine. And with that, investors may need to rethink how they design their portfolios.
The Growth Of Passive Management
Pioneered by Vanguard founder Jack Bogle in 1976, index funds have gained immense popularity with investors over the ensuing decades. By offering a simple, transparent way to invest in a broad market segment by tracking an index like the S&P 500, passive management has become the go-to way many investors —both big and small —build their core portfolios.
The birth of exchange-traded funds (ETFs) has only exacerbated this fact.
Thanks to their lower cost of ownership, intraday tradability, and a host of other benefits, passive ETFs have grown into a behemoth. The “first” ETF alone, the SPDR S&P 500 ETF Trust, has a staggering $674 billion in assets and counting.
This growth of passive ETFs and indexing has come at the hands of active management. With higher fee hurdles and other issues plaguing active funds, they have continued to underperform many passive strategies and their benchmarks. This has only added fuel to the fire, sending more investors into passive funds.
Over the past 30 years, passive fund management has grown from less than 5% of the U.S. stock and bond mutual fund and ETF markets to more than 53%. 1
Active Starts To Win
But active management may have the last laugh in this passive/active debate. That’s because some of the reasons why indexing has won out are now starting to go away.
For one thing, accommodative monetary policy lifts all boats. According to asset manager T. Rowe Price, the post‑global financial crisis (GFC) era of low rates and abundant liquidity created conditions that benefited index funds and their design. Essentially, the sheer ease of and access to money lifted all boats. You can see that in the shrinkage of stock market dispersion over the last couple of decades. Higher correlations between individual stocks are now commonplace. In fact, data suggests that the markets are the most concentrated in more than 50 years.
This chart from T. Rowe highlights’ how long-term stock dispersion has shrunk.
Source: T. Rowe Price
However, the shift could now be on. Valuations have continued to get stretched, and uncertainty has risen. This has increased overall volatility. According to T. Rowe, this is terrific news for active investors and management.
Active managers have traditionally looked beyond benchmarks to find additional sources of diversification. This includes value seeking, moving down the market-cap ladder, and even going abroad to find stocks. As such, they tend to beat benchmarks when concentrations/correlations are high. Data backs this up.
For example, the Dot‑com Boom/Bust of the late 1990s, the combined weight of the top 10 stocks in the S&P 500 peaked at 25%. During the boom, active managers tended to underperform. However, when the bubble burst and hit a max correlation in March of 2000, active managers were able to add significant alpha and excess returns versus passive strategies.
With today’s combined weight of the top 10 stocks in the S&P 500 hitting 38.2% plus all the other factors, active managers have a real advantage to beat passive funds yet again. And while the Fed has started to cut interest rates, nearly every analyst and pundit expects long-term rates to stay high and not approach zero in the near-term future.
With that, active management may have a serious win in the quarters ahead.
Active ETFs Make This Scenario Even Better
The real win is that the growth of active ETFs enhances managers’ ability to provide additional alpha. That’s because of the structural nature of active ETFs versus previous active vehicles like mutual funds.
Active ETFs are lower-cost and have lower fee hurdles. This allows investors to keep more of the additional returns generated. And speaking of those returns, the elimination of cash drag and additional tax benefits from the creation/redemption mechanism of ETFs further boost these returns.
The end-all be-all is that active management and ETFs could be the best place for investors to park their savings and provide a better bet than passive funds in the years ahead.
Popular Active ETFs
These ETFs are sorted by their YTD total returns, which range from 3.1% to 18.4%. They have expense ratios between 0.17% and 0.70% and assets under management between $500M and $42B. They are currently yielding between 0% and 9.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| CGGR | Capital Group Growth ETF | $16.7B | 18.4% | 0.4% | 0.39% | ETF | Yes |
| FBCG | Fidelity Blue Chip Growth ETF | $4.9B | 15.5% | 0.5% | 0.60% | ETF | Yes |
| TCHP | T. Rowe Price Blue Chip Growth ETF | $1.6B | 15.1% | 0% | 0.57% | ETF | Yes |
| DFAC | Dimensional U.S. Core Equity 2 ETF | $38.4B | 11.3% | 0.8% | 0.17% | ETF | Yes |
| JEPQ | J.P. Morgan Nasdaq Equity Premium Income ETF | $30.9B | 11.4% | 9.7% | 0.35% | ETF | Yes |
| DFUV | Dimensional US Marketwide Value ETF | $12.3B | 9.2% | 1.5% | 0.21% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $21.1B | 7.2% | 4.9% | 0.36% | ETF | Yes |
| JEPI | JPMorgan Equity Premium Income ETF | $41.3B | 5.4% | 7.4% | 0.35% | ETF | Yes |
| HYBL | SPDR Blackstone High Income ETF | $511M | 5.6% | 8.2% | 0.70% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $34.1B | 4.4% | 5.2% | 0.18% | ETF | Yes |
| AVUV | Avantis U.S. Small-Cap Value ETF | $18.6B | 4.1% | 1.4% | 0.25% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $14B | 4.1% | 5.3% | 0.35% | ETF | Yes |
| DFAT | Dimensional U.S. Targeted Value ETF | $11.6B | 3.1% | 0.8% | 0.28% | ETF | Yes |
Overall, conditions allowed for passive investments to rise over the last couple of decades. But those conditions are starting to shift. With correlations and stock market dispersions now eclipsing traditional levels, growing uncertainty and increasing volatility are commonplace, and the time for active managers to shine is at hand. And now, active ETFs could enhance their ability to do just that. Going forward, investors may want to shift their holdings to a more active approach to gain the additional alpha generated.
Bottom Line
After years of passive performance, index funds could be losing out to active management. Thanks to changing conditions and the rise of active ETFs, managers may finally regain the crown from indexing. Investors should plan accordingly.
1 T. Rowe Price (July 2025). Active investing is suited to the challenging markets ahead
