The Growth of the ETF

Why Have ETFs Become so Popular?

Exchange-traded funds’ (ETFs) popularity has grown immensely over the years, now holding a staggering $13.74 trillion of AUM as of June 2025. The rapid expansion of the ETF universe is expected to continue, with estimates that the market may even double in size by 2030. Why have ETFs become such a popular vehicle for investing? Why have retail investors started to abandon the traditional mutual fund for the convenient ETF? ETFs provide several advantages for investors, like diversification, transparency and accessibility and low costs.

ETFs can give your portfolio built-in diversification benefits. They trade on exchanges like stocks while offering the diversification benefits of mutual funds. ETFs typically hold baskets of securities, such as stocks, bonds, commodities etc. You can gain exposure to a wide range of different assets or indices with different risk/return characteristics through a single investment vehicle, rather than buying and selling individual securities yourself. By holding a variety of securities within one vehicle, the risk associated with the negative performance of a single security or asset can be mitigated by potential appreciation in others.

Most ETFs disclose their portfolio holdings daily on their websites, which provide investors with a detailed view of the underlying assets in the fund. Knowing what the ETF holds allows investors to understand their exposures to certain sectors, industries, and regions enabling more informed investment decisions. ETFs are also very simple to trade on major stock exchanges, like stocks, allowing investors to buy and sell shares throughout the trading day at current market prices. ETFs provide access to a wide array of markets and asset classes, which may not have been previously accessible to many individual investors.

Compared to traditional mutual funds, ETFs are known for their generally low costs and tax efficiency. ETFs have fees that are referred to as ‘expense ratios’, which are generally charged annually by the ETF fund to cover its operating expenses. These fees are expressed as a percentage of the ETFs assets. ETF expense ratios are minimal, generally ranging from 0.05%-0.3%, but can vary depending on the type of investment strategy and size of the fund you are investing in. When investors sell their ETF shares, they’re typically sold to other investors on the market, not redeemed to the fund itself like mutual funds. The fund then avoids the need to sell securities, which potentially triggers capital gains distributions to all fund shareholders.

Chart 1: ETF Growth, 2000 to 2023^[1]

Active Versus Passive ETFs

There are two main types of ETFs that represent different approaches to investment management: The active and passive ETF. Active ETFs aim to outperform a benchmark by actively managing the portfolio. A portfolio manager makes investment decisions based on their expert research and analysis, with the goal of outperforming the market.

The active approach can lead to higher returns but carries the risk of underperformance. Active ETFs are becoming more popular, as they accounted for 76% of all U.S.-listed ETF launches in 2023, and 43% of global ETF launches. BlackRock also projects that global active ETF assets under management will surge to $4 trillion by 2030, a more than four-fold increase from $900 billion as of June 2024.^[2]

On the other hand, passive ETFs seek to replicate the performance of a specific index. Passive ETFs aim to return the same performance as the index, meaning they’ll neither underperform nor beat the market as measured by such index. The ETF will benefit as the index performs well, but will also experience the same downside when the index performs poorly.

Chart 2: Global Active ETF Growth^[3]

The Current State of the ETF Market

As previously mentioned, the global ETF market holds $13.74 trillion of assets under management as of June 2025. Nearly 70% of the global ETF assets under management reside in the U.S. The ETF market has grown at a compounded annual growth rate (CAGR) of 13-18% in recent years, which has outpaced traditional mutual funds by nearly threefold. From just a handful of U.S.-based funds in 1993, to now over 13,000 globally, ETFs have evolved to provide transparent access to a broad range of asset classes and different sectors. Investors continue to contribute their money into ETFs, with record-breaking inflows in 2024 that surpassed $1.1 trillion.

Most ETFs seek to track a specific index, but this is changing. Investors increasingly want the same low-cost, tax-efficient ways to invest, but with active ETFs, you can add alpha-seeking strategies.

Chart 3: Quarterly ETF Flows^[4]

What Comes Next?

There is a clear trend in the ETF market, which is the emergence of the active ETF. Actively managed ETFs accounted for $299 billion of ETF industry inflows in 2024. Of the 723 ETFs that were launched in 2024 (a new record), 575 were actively managed ETFs.^[5] Currently, active ETFs only represent 7% of the ETF universe, however, they accounted for 26% ($295 billion) of those flows in 2024, compared to just 1% a decade ago. The active ETF momentum was not an overnight phenomenon; they have been climbing at an impressive 39% annual growth rate since 2019.^[6] Active ETFs are becoming a core part of many asset managers’ active strategies, and we are increasingly seeing new launches, or conversions into the ETF wrapper. 

What has made active ETFs increasingly more attractive for investors? There are a few reasons. With increased market uncertainty (especially evidenced in 2025), comes greater dispersion and volatility in markets. That leads to differences in performance across companies, sectors, geographies, and asset classes. The greater the dispersion, the greater the potential for asset managers to generate returns above benchmarks, or alpha. Portfolio managers of active ETFs can also incorporate their proprietary research and react in real-time to evolving market conditions. This gives managers the freedom to respond to market developments quickly as they seek to outperform benchmarks.

Active ETFs also provide the potential for fewer capital gains and better tax efficiency. Active ETFs can facilitate the exchange of underlying holdings for ETF shares without creating a taxable event. This contrasts with mutual funds, where selling securities to accommodate investor redemptions generates taxable capital gains that are then passed onto investors. Active ETFs offer portfolio managers the opportunity to tax-loss harvest, where they can sell their losing positions then purchase similar holdings in the ETF, offsetting capital gains and reducing tax liabilities.

Active ETFs provide everyday investors with the ability to combine the benefits of active management with the simple and convenient ETF structure. Investors gain the potential for outperformance with the expertise of portfolio managers, through the product trading like stocks on an exchange. Active ETFs are enabling innovative and thematic investment strategies that align with long-term trends and objectives, making them attractive options for investors looking to potentially outperform the market and navigate diverse market conditions.

Chart 4: Active ETF AUM expected to surpass active mutual fund AUM by 2035.^[7]

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Sources

^[1] Source: Morningstar, As of December 31, 2023.

^[2] Source: Blackrock, As of June 30, 2024.

^[3] Source: Blackrock, As of June 30, 2024.

^[4] Source: Fidelity. As of May 11, 2025.

^[5] Source: Fidelity, As of May 11, 2025.

^[6] Source: Cohen and Stears, As of January, 2025

^[7] Source: Deloitte, As of April 24, 2025.

Disclosures

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