The volume of active exchange-traded funds (ETFs) remains low compared to the volume of passive ETFs. According to the research and consultancy firm ETFGI, assets invested in the actively managed ETFs listed globally reached $1.86trn in November 2025. They account for a little under 10% of the total assets invested in the ETF industry globally, which stood at $19.44trn at the end of November.

Active ETFs are growing rapidly

This is driven by two main factors, explained Laurent Barras, a finance professor at the University of Luxembourg. First, investors often assume that the benefits of passive ETFs – such as lower costs and greater liquidity – also apply to active strategies. Second, ETF distribution differs from that of traditional mutual funds: ETFs are traded on exchanges and accessible via brokerage accounts.

This suggests that they attract new capital from investors outside traditional bank-mediated networks. As studies in the United States have also shown little evidence of “cannibalisation,” this implies that these ETFs manage to attract fresh capital rather than simply bring in assets from existing mutual funds.

Short track records

Assessing whether this growth is justified remains challenging. Evaluating active ETF performance is difficult because most products lack a meaningful track record—an issue that may support current growth. The investment research company Morningstar reports underperformance over one- to three-year horizons (see chart), but Barras stressed that results are often too “noisy” to draw statistically meaningful conclusions. With such limited history, reliable performance analysis is almost impossible due to high return volatility.

I do not expect extraordinary growth in active ETF s if it is not supported by performance.

Laurent Barras, finance professor , University of Luxembourg

Take, for instance, a manager with no real skill (performance) – someone with a true net alpha of zero. Around one in four managers may seem to produce a 3% annual alpha over three years – yet this can be nothing more than luck. Such figures are often highlighted in marketing materials, representing nearly 60% of the long-term equity premium (typically around 5%). Barras, however, argued that these figures provide no meaningful insight into managerial ability.

Over the long term, Barras expects active ETFs to mirror the underperformance observed in traditional active mutual funds once a decade or more of data becomes available. “I do not expect extraordinary growth in active ETFs if it is not supported by performance,” he said.

Underperformance: who is responsible?

Even when skill exists, structural factors limit returns. Research indicates that the failure of active management to deliver net returns is rarely due to a lack of skill; around 80% of managers generate profitable ideas and create gross value. Some studies find that alpha on the first dollar invested (before scale effects) can reach 3.5% per year.

The main barriers preventing this value from reaching investors are capacity constraints and fees. “There is a significant difference between managing $10m and $1bn,” noted Barras. As funds grow, they become like an “elephant in a china shop,” with large trades moving market prices against them.

Consequently, it degrades the execution of even the best investment ideas. The “small is beautiful” principle applies to active ETFs, mutual funds and hedge funds alike. Once a fund exceeds its optimal size, its ability to generate alpha decreases.

The industry must also determine how value creation is shared. Investors’ bargaining power remains weak, and there is little evidence that active ETFs will change this dynamic. While some fee compression is evident, the main beneficiaries are fund groups, which gain access to new clients without relying on traditional bank intermediaries.

A transparency trap

Active ETFs face a structural challenge around transparency. To keep market prices close to net asset value (NAV), funds must regularly disclose their portfolios to market makers and authorised participants to enable arbitrage. In contrast, traditional mutual funds can keep holdings more private, allowing them to exploit proprietary information more effectively. As a result, active ETFs are often pushed towards shorter-term signals, which historically generate less value than long-term strategies.

This transparency requirement introduces a high risk of front-running, where other market participants anticipate and exploit trades. It also makes it difficult for managers to build positions gradually without signalling intentions to the market. “The ETF is not a product that naturally transitions from passive to active,” added Barras.

While passive ETFs offer clear advantages – including efficient liquidity provision, tax benefits (this is the case for US investors in particular, less so for Europeans) and trading flexibility – these advantages are less pronounced for active structures. Passive ETFs dominate because investors trade among themselves on the exchange rather than relying on the fund to provide liquidity.

Concentration concern

Elevated valuations and a strong concentration in technology stocks raise questions about the risk profile of a purely passive strategy tracking the S&P 500. With price-to-earnings ratios at unusually high levels, Barras suggested that diversification across other markets may offer a more prudent approach for investors concerned about speculative bubbles.

For the average investor, passive ETFs remain the more reliable option. Active ETFs, despite strong growth, face structural constraints that limit their ability to deliver consistent value.

This article was written for the Asset management supplement of Paperjam magazine’s May 2026 issue, published on 29 April. It is published on the site to contribute to the full Paperjam archive. Click this link to subscribe to the magazine. Is your company a member of the Paperjam Club? You can request a subscription in your name. Please let us know via club@paperjam.lu