Something unusual is happening in a market long dominated by index funds. Active management is staging a comeback.

Take the action in equity exchange-traded funds two weeks ago. Amid more whipsaw action in stocks that has typified 2025 trading, there was a net outflow from equity ETFs. But in a surprise, the selling was mostly on the index fund side. There were net outflows of $1 billion from equity ETFs in all, but $3 billion in inflows to active equity ETFs to offset the $4 billion of index fund withdrawals, according to ETF Action data.  

Investing experts say actively managed ETFs time in the spotlight marks a transformation that may reshape the ETF space for years to come. A record number of ETFs has launched this year, with 288 new funds and the potential for over 1,000 new ETFs by year-end. In total, there are now more than 2,000 active ETFs, rivaling the total number of index ETFs. While they only make up about 10% of total ETF market assets, they’ve taken over one-third of the flows this year from investors.  

Through the trading week ended April 25, ETFs had taken in $363 billion in flows in 2025, with $132 billion (34%) into actively run funds.

“Actively managed ETFs are taking over the marketplace,” said Jon Maier, JPMorgan Asset Management chief ETF strategist, appearing on last week’s “ETF Edge.”

JPMorgan offers a range of actively managed ETFs, including its popular income ETF JEPI.

There are good reasons for all investors, whether index or active, to use ETFs. Buying and sell stocks offers tax efficiency in the ETF wrapper, they offer all-day trading liquidity, and many ETFs have relatively low expense ratios. More active ETFs are on the way, with a decision from the SEC expected that would allow companies that currently have traditional mutual funds to offer a version of any of those funds as an ETF. 

“There is parity between active and passive now even if the asset bases are very much different,” Maier said, referring to the fact that index funds continue to hold the larger share of total assets ($231 billion in this year’s flows).

After decades during which active stock pickers have often been exposed as “closet indexers” in their funds — in effect buying up what the index holds more than distinguishing their portfolios from benchmarks — it is important for investors to identify funds that are taking a unique approach, and how that approach is structured.

Mike Akins, founding partner of ETF Action, said investors can look at a measure of correlation to the overall market — R-squared — as one way to get a sense for a fund’s “active” nature. Some ETF managers are running what are “active by default” funds with a tilt, a quantitative model unique to their firm which enhances the underlying index performance, but remain closer to the index in overall composition, such as Dimensional Fund Advisors and Advantis ETFs. On the other hand, firms like JPMorgan and T. Rowe Price, from the traditional world of active stock picking and fundamental stock analysis, are doing more “bottoms up” evaluation of stocks and as a result their R2 is “a little lower,” Akins said.

‘Don’t do anything stupid when the market is crazy.’ 

As more money shifts into active, it’s critical for investors to not overreact to short-term swings in the market. Investors may have moved a lot of money earlier in April when the markets fell apart, but as of the end of last week’s trading, stocks had come full circle in a trip that had seen them down as much as 13% in the month. With Friday’s surge capping the longest winning streak for the S&P 500 in two decades, the market had recovered all of its losses since April 2 when President Trump first announced global tariffs, a rebound measured by returns in both the S&P and Nasdaq.

“Don’t trade around when the market panics,” said Bob Pisani, CNBC Senior Markets Correspondent and “ETF Edge” host. “Don’t do panic trading. It’s an old story, for 40 years been saying it, but it really bears repeating. Don’t do anything stupid when the market is crazy.” 

Or, in the words of Vanguard Group founder John Bogle, the index fund pioneer: “Don’t do something … stand there.” 

As investors choose their preferred approach to gaining market access, history says the most important trading strategy is to remain invested, and recent weeks make that point, with 5-7% down days followed by a 10% up day. “If you missed that day, got scared and sold on the 5% down day, it really impacts returns in a long-term portfolio,” Maier said. “Time in the market, not timing the market. Sometimes it is hard and painful, but for investors that have the wherewithal, over the long term you probably will benefit,” he added.

There will continue to be reasons for shift in flows away from blanket index fund exposure as macro trends lead the institutional side of the market to use more active ETFs. Funds like JEPI, which provide income and downside protection, or buffer ETFs that limit the impact of stock volatility on returns while capping upside, are primarily popular with registered investment advisor firms that are buying on behalf of many clients for whom they manage investments. “RIAs are allocating clients to it,” Akins said. “Everyone has agreed for a while that we have had historically high valuations, and the market needed a reset, so people took a little risk off” he added.

Some of that shift has occurred due to the volatility in the bond market, which investors have long relied on for income, but where action in Treasury yields has made advisors and investors anxious about investing in anything but ultra-short term bonds (roughly 60% of all bond ETF flows this year). “They found a different way to allocate fixed income money to similar beta, or up and downs in the market, and capture that side of the market, but in a way that can meet income needs and gain some return from the overall equities market,” Akins said. 

Where battle between index funds and active is headed

The rise of the younger retail investor is also an important part of the active phenomenon.

Robinhood CFO Jason Warnick said on its earnings call last week that the brokerage app saw “incredibly strong engagement across the board,” through the first quarter and in April. “When the market is down, our customers tend to be net buying on the day. A few years ago, folks were worried about what will happen to the retail trader if the market softens? This quarter and the strength of April really helps to answer some of those questions.”

That comes with some outsize active trading risk, though, according to Akins, with the younger generation of “YOLO” investors really leaning into leverage and inverse ETF strategies. With $10 billion in inflows year to date, leveraged and inverse ETFs investing in a single stock like Tesla or Nvidia typify this trend.

“All the evidence says this is not institutional money. Less than 5% of these ETFs are held by institutions based on 13F filings. It is being driven by retail,” Akins said. “On the leverage ETF side, there are just more and more people embracing the stock market and more ‘Robinhood’ traders are willing to do some crazy stuff.”

Maier says there will be more of a gradual move into active ETFs in more traditional asset classes, such as large-cap value and growth, and international, as the ETF structure becomes more accepted.

Akins expects any split in the market to still lean heavily on the side of index funds within traditional investing strategies, with passive funds taking 80%-90% of assets overall. But the trends of the past few years, from the risk-on single-stock funds to the new income and downside protection strategies, will grow.

“We will continue to see the spicy side of the market grow more and more, leverage and inverse. Every weekend, when I sit down to review new launches, I just shake my head on the single stock side. But we will see more innovation on synthetic income and buffered strategies … a continuation of the big themes we’ve been seeing,” he said. 

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