The Rise of Active ETFs: Can Fund Managers Outperform Passive Investing?

The article argues active ETFs often struggle to outperform passive benchmarks after fees: SPIVA data cited shows 79% of actively managed large-cap funds underperformed the S&P 500 last year and only 24% of active ETFs beat their benchmarks over 10 years. It highlights the fee headwind—average expense ratio about 0.69% for active vs ~0.10% for passive—suggesting performance gaps can persist despite some narrowing as active account costs fall. Overall, the piece is informational with limited near-term market impact.

Analysis

This is less an alpha story than a wrapper-migration story. If active ETF adoption keeps rising, the real beneficiaries are the toll collectors: exchanges, market-data, authorized participants, and index/portfolio infrastructure. NDAQ is the cleanest listed proxy because more ETF launches and more intraday trading lift listing, data, and market-services revenue even if the underlying manager economics stay mediocre.

The losers are legacy active managers whose economics depended on mutual-fund distribution and higher fee drag. The second-order risk is that “active ETF growth” can actually accelerate fee compression across the industry: managers are forced into a lower-fee wrapper to stay relevant, which helps flows but can hurt margin dollars per unit of AUM. That effect is most visible over 1-3 quarters as advisor platforms rebalance model portfolios, but the structural pressure lasts 6-18 months if ETF shelf space keeps displacing mutual funds.

Contrarian angle: the consensus may be overestimating how much of this is genuine alpha demand versus repackaging of the same assets into a more tax-efficient vehicle. Most new launches never scale, so launch-count statistics can look impressive while economics remain trivial. The thesis is falsified if active ETF AUM fails to compound, or if NDAQ’s market-services growth does not re-accelerate despite the launch wave.

Key Decisions for Investors

• Long NDAQ / short TROW over the next 3-6 months as a relative-value expression of ETF wrapper growth vs. legacy active-fee compression; target a 5-8% relative spread with a stop if NDAQ underperforms XLF by >5% or NDAQ market-services growth disappoints.
• If buying convexity, use a modest 3-6 month NDAQ call spread on a post-rally pullback rather than chasing strength; this caps downside if active ETF launches prove to be mostly cosmetic.
• Do not buy standalone active-ETF launch stories until at least one quarter of net new AUM data confirms scale; treat sub-$1B inflows as noise, not a margin inflection.
• Watch BEN and TROW into any sector bounce as shorts on fee compression risk; if advisor-channel data shows accelerating ETF shelf adoption, add on strength.
• Use NDAQ as the preferred long versus broad asset-manager exposure rather than passive-only names, because the exchange/data revenue stream is less dependent on any single fund’s ability to outperform.