Active managers flocked to “grab a slice” of the growing ETF market last year, despite passive funds emerging as a clear favourite, which experts say has left some managers facing outflows.
According to Betashares’ annual ETF review, 2025 was “all about passive investing” as passive ETFs captured $38.9 billion of the $53 billion net flows, with these funds seeing more net flows than the total $30 billion from across the ETF market in 2024.
The remainder of the flows were split across smart beta and active ETFs, capturing $8.2 billion and $6.3 billion, respectively.
Despite the overwhelming support for passive funds, last year saw a significant number of active ETFs hit the market.
Betashares associate director and investment strategist Tom Wickenden told Money Management the last five years have seen active managers increasingly seek opportunities to “grab a slice” of the growing ETF industry by launching their existing strategies as ETFs.
With ETFs becoming more widely used among investors, Wickenden suggested active managers are doing this in an attempt to make their investment strategies more relevant to these investors, with mixed levels of success.
“Investors have gravitated to index-based ETFs with far greater reliability in their portfolio. With a small number of exceptions, this largely a result of the fact that ETF investors have eschewed often underperforming and higher cost active managers in their portfolio in place of passive and smart beta strategies,” Wickenden said.
Although some active ETFs did do well in terms of flows and performance, he said the challenge is to see whether the same active funds can maintain ongoing success.
Weighing in on the discussion, Russel Chesler, head of investments and capital markets at VanEck, said the rapid growth of the market have made the ETF structure attractive to active managers, but suggests that some may be taking the wrong approach to it.
“We have seen many active managers use ETFs as an additional channel to distribute their existing investment strategies rather than launch strategies that have been designed specifically for the ETF market,” Chesler said.
“Launching an existing strategy, which is not attracting flows as an unlisted fund, as an ETF is not going to change anything.”
Meanwhile, the highly concentrated nature of the ETF market can make it even more challenging for smaller managers to carve out meaningful space.
Chesler added: “Flows to active managers were concentrated with 50 per cent of flows going to five managers. Out of the 70 active managers issuing ETFs, 41 received less than $50 million in net flows, including 16 which were in outflow.”
Where passive ETF providers usually have a broad range of solutions on offer, allowing investors to build out their portfolio with a single provider, Chesler said active managers are often more limited.
“Providers of active ETFs often offer only one or a small number of strategies, and they frequently mirror their existing managed fund offerings,” he said.
Active managers are also competing against the rising trend of smart beta ETFs, with these funds providing the benefits of index management with advantages typically associated with active managers, according to Wickenden.
“We have seen the share of flows into smart beta ETFs double over the past five years, playing a critical role in investors’ portfolios that was historically reserved for active managers,” he added.
Cost and transparency have also become increasingly important to investors and advisers when it comes to fund selection, leaving the often more expensive active funds at a disadvantage.
In comparison, Chesler said a driver behind passive ETFs’ strong demand is they are closely aligned with how investors and advisers construct portfolios.
“They offer transparent, rules-based exposure, low fees, liquidity and tax efficiency, while providing access to a broad range of markets and asset classes,” he said.
“Demand has also been supported by the growth of smart beta ETFs, which go beyond traditional market capitalisation indexing by targeting specific factors or outcomes such as outperformance, higher yield or better diversification, and they do this while retaining the low fees, liquidity and tax efficiency.”
