Active ETFs Have the Flows but Not the Returns

Despite their explosive growth, U.S. equity active ETFs have failed to deliver on their core promise: outperforming simple, low-cost index funds.

Active exchange-traded funds have become Wall Street’s product of the moment. They promise professional management wrapped in a tax-efficient, tradeable structure – and investors have responded with enthusiasm, pouring hundreds of billions of dollars into the category.

The problem is that the results haven’t matched the excitement. Despite their explosive growth, U.S. equity active ETFs have failed to deliver on their core promise: outperforming simple, low-cost index funds.

Over the last three, five and 15 years, U.S. equity active ETFs have underperformed the S&P 500 by large margins and have done so with higher volatility, based on data from Morningstar Direct. The probability of selecting an active ETF that will beat an index fund is less than 50%, and that is before adjusting for survivorship bias.

Before looking at the track record of active ETFs, let’s review their history and how they became the focus of ETF activity.

The emergence of active ETFs

Unlike traditional ETFs, which track an index, active ETFs are run by portfolio managers who select individual securities. In 2011, U.S. active ETFs had a mere $6 billion in assets, out of the ETF universe of approximately $1 trillion. By the end of 2025, that number grew 300-fold to $1.86 trillion, which is a compound annual growth rate of nearly 50%.

There were approximately 2,200 active ETFs as of the middle of last year, and that constituted more than half of the 4,300 U.S. ETFs. There were roughly 1,000 active ETFs launched last year.

The primary driver of that growth was a rule change in 2019 (SEC rule 6c-11), which simplified and accelerated the process for launching an active ETF. The appeal of the ETF wrapper has drawn flows – principally because of the tax advantages vis-à-vis mutual funds and separately managed accounts. Distribution has shifted, with model portfolios increasingly using active ETFs, which drove adoption by advisors. According to BlackRock, RIAs held $452 billion in active ETFs as of Q1 2025.

As indexing grew in popularity, average expense ratios were driven down. Asset managers responded to that fee pressure by offering their products in the ETF format. Tighter bid-ask spreads and improved operations further drove RIA adoption.

The chart below shows that active equity ETFs didn’t win gradually – they won suddenly:

The AUM data (blue line) shows that there were three regimes: an experimental phase from 2011-2016, when active ETFs were a niche product with a small asset base; a proof-of-concept phase from 2017-2019, when assets climbed, but at a modest rate; and an institutional-adoption phase from 2020-2025, when the curve went convex and active equity ETFs became a core element of portfolio construction.

The orange line shows that fund count grew much faster than assets early, which suggests that many early launches were experimental. After 2020, both lines rose together, as the product-market fit matured, distribution channels solidified and survivors gathered assets.

This is the pattern one would expect as a product matures from early stage to rapid adoption. Asset managers are thriving, as active U.S. equity ETFs have an average expense ratio of 0.57%. But investors’ wealth has languished.

The track record of U.S. active equity ETFs

The table below shows the disappointing performance of U.S. active equity ETFs:

Over the past three, five and 15 years, the average active U.S. equity ETF underperformed VOO (an S&P 500 ETF) by 369, 368 and 244 basis points, respectively. Over those time periods, only 26.6%, 11.9% and 43.3% of ETFs outperformed VOO.

I compared active equity ETFs to the S&P 500 index because that is the basic test of their utility. The baseline portfolio for any equity investor should be whether a product can outperform a passive, low-cost, diversified index, and this methodology is such a test. One might ask how these funds performed relative to their peer group, but that is a secondary concern.

Because of survivorship bias, those numbers present an unrealistically positive picture of active equity ETF performance. This data does not incorporate the performance of ETFs that were merged or liquidated by asset managers. For example, there were 150 ETFs closed in 2025, half of which were U.S. equity products. Since 2007, when the first active ETF was launched, approximately 700 have been closed. Since many closures are due to poor performance (asset managers seldom shut down an outperforming product), the average performance of surviving products is overstated.

The 43.3% of active U.S. equity ETFs that outperformed over the last 15 years is surely inflated by survivorship. Asset managers are prone to close funds with small asset bases. But even the largest active U.S. equity ETFs did not do well. Of the 10 with the greatest AUM, only three outperformed VOO over the last 15 years. The average performance of those 10 was 12.19%, or 184 basis points less than VOO.

These results mirror the underperformance of active mutual funds, as reported by S&P through its “SPIVA” scorecard. That data shows that only 5% of active large-cap mutual funds outperformed over the last 20 years. (The SPIVA data cannot be directly compared to these results, since SPIVA uses a risk-adjusted methodology.)

The poor performance of active ETFs cannot be explained by lower risk.

As the above data shows, active U.S. equity ETFs had higher volatility (measured by the standard deviation of returns) over the last three, five and 15 years.

Implications for the future

In late 2025, the SEC issued an exemptive order allowing Dimensional Fund Advisors (DFA) to add ETF share classes alongside traditional mutual fund share classes within the same registered fund structure. This was a long-anticipated move – especially since Vanguard’s patent on a similar structure expired in 2023.

This means that a single mutual fund can now have both ETF and regular mutual fund share classes on the same underlying portfolio. The ETF shares trade on an exchange, while the mutual fund shares are bought/sold at NAV.

About 30 firms have applied to the SEC for permission to create active ETF share classes.

This could significantly accelerate the migration of assets from mutual funds to ETFs, including both active and passive products.

There have been instances of the same product being offered in both mutual fund and ETFs format, although not as a separate share class. The ETF VOO has a mutual fund counterpart, VFIAX. DFA also has products in both ETF and mutual fund format. Those cloned products have performed within five basis points of one another. The differences have been due to expense ratios and the fact that mutual funds must maintain a cash reserve to handle redemptions.

The real test for active equity ETFs will come in the next sustained market downturn. Unlike mutual funds, active ETFs must disclose holdings daily, a requirement that some managers worry will expose portfolios to front-running. And while mutual fund managers typically execute trades directly, ETF transactions often run through third-party market participants, adding a layer of cost or friction at precisely the wrong moment.

For all their innovation, active ETFs ultimately face the same obstacle that has confronted generations of active managers. Decades of academic research – and now a growing body of ETF data – show how hard it is to beat broad, low-cost index funds over time. The packaging has changed, and the flows have followed. The math has not.

Robert Huebscher was the founder of Advisor Perspectives and its CEO until the company was acquired by VettaFi in 2022. He was a vice chairman of VettaFi/TMX until April 2024.