The appeal of active exchange-traded funds hangs on the promise of better performance and greater tax efficiency. The latter is irrefutable. But do active ETFs outperform mutual fund peers? My research shows that active ETFs mostly carve their edge against active mutual funds with low fees, but their advantage may not stop there.
Active ETF Explosion
This next generation of actively managed funds blossomed after the ETF Rule debuted in 2019. The ETF Rule made it easy to launch new ETFs, and custom creation/redemption baskets gave portfolio managers new flexibility.
The result:
- Nearly 3,000 active ETFs have been launched since the start of 2020.
- Net assets invested in active ETFs have grown from $140.0 billion to over $1.6 trillion.
Investors increasingly look to ETFs for active management. Active ETFs have consistently added new money, while active mutual funds have tried to stave off outflows with little success.
Active ETFs Improve Success Rates
Morningstar’s US Active/Passive Barometer pits active funds against a benchmark average of passive funds in the same Morningstar Category. Active funds struggle to outperform their average passive fund, especially over longer periods.
Since most active ETFs launched in recent years, we can’t test long-term success rates (that is, the percentage of active funds that survive and beat their average passive peer). Instead, I compared the three-year performance of active ETFs against mutual funds to see whether investors really found a better mousetrap in ETFs.
First, I broke up active ETFs and mutual funds within the 19 of 20 categories used in the Active/Passive Barometer (there were no active ETFs in the European stock category). So far so good for active ETF investors: Three-year success rates were 50% for active ETFs versus 41% for active mutual funds, and ETF success rates were higher than active mutual funds in 14 of 19 categories.
It wasn’t just success rates, active ETFs averaged higher returns than mutual funds in 12 of 19 categories.
Low fees played a key role in active ETFs’ success. On average, ETF fees were 37 basis points lower than active mutual funds. The performance advantage of ETFs dissipated when comparing gross returns (that is, prefee returns) to mutual funds. ETFs outperformed mutual funds in 10 of 19 categories using gross returns.
At a minimum, active ETFs have delivered similar performance to their mutual fund cousins at a lower cost. As Jack Bogle once said, “In investing, you get what you don’t pay for.” Active ETFs share more of their wealth with investors, in part because of ETF investors’ fickleness.
Active ETF Strategies Are Improving
The post-ETF Rule active ETFs that came to market were launched by some powerhouses in active mutual funds. Firms like Dimensional, JPMorgan, and Capital Group quickly became some of the largest issuers of active ETFs in recent years. With those investing chops came higher-quality strategies and even more intense competition on fees.
The winner? Investors. In 2025, active ETFs launched after 2020 outperformed those that launched before 2020 in 13 of 18 categories (foreign small/mid blend didn’t house any active ETFs from before 2020).
Finding Success With Active ETFs
Active ETFs performed well during the past few years. Newer active ETFs even more so. But these are small sample sizes that bear monitoring.
Investors would be wise to pursue active ETFs’ edge while remaining grounded. Avoiding bad ETFs is just as important as searching for good ones. Active ETFs’ success is defined by their lower fees and high-quality franchises, but not all active ETFs charge low fees. And many new ETFs are speculative and don’t sit in the categories used in this analysis. Selecting low-fee active ETFs from reputable managers should improve the odds of success.