What trends are contributing to the rise of active ETFs

ETFs have experienced rapid growth with no signs of slowing down. At the close of Q4 2024, global ETF assets under management (AUM) hit US$14.8 trillion¹, while Luxembourg alone saw its ETF market reach US$384.2 billion². Forecasts suggest European ETFs will reach US$4.5 trillion by 2030, with global assets soaring to US$25 trillion. A significant driver of this growth? Active ETFs.

In the US, active ETFs make up 8% of ETF AUM, and almost half of 2024’s net inflows³. While in Luxembourg the overall market is still fairly small (only 1% of overall ETF AUM)⁴, the momentum is building as new providers and products enter the space. What are the trends contributing to this surge in growth?

A market of untapped potential

The potential of this market in Europe is enormous: despite Europe’s population being almost double that of the US, ETFs make up only around 10–15% of the current market, compared to 40% in the US⁵. This gap signals room for growth, particularly among European retail investors. The increasing demand for returns higher than index-trackers is fueling interest in active ETFs, as investors seek strategies that aim to outperform benchmarks while benefiting from the efficiency and transparency of ETFs.

Fall in regulatory barriers

Regulatory shifts are also propelling the rise of active ETFs in several jurisdictions. As mentioned in our previous article, the subscription tax on actively managed ETFs has been removed, while the CSSF’s latest clarification indicates actively managed UCITS ETFs need only disclose their holdings (at least) monthly, with a maximum time lag of one month. The CSSF has also communicated a new simplified procedure for the creation of a new share class which does not require a prospectus update.

Product innovation

The ETF industry thrives on innovation, and the surge in active ETF inflows has encouraged a wave of new product launches. This, in turn, attracts capital, but standing out in a competitive landscape remains a challenge. Advancements in technology and investment strategies are driving diversification in active ETFs, allowing them to cover thematic, sector-specific and specialized strategies. In 2024, several innovations made waves, including the single stock ETF, buffer ETF and digital asset ETFs/ETPs.

Simplified entry

As competition intensifies, entry points into the ETF market become more accessible. Firms of all sizes, from boutique operators to mid-tier firms and major asset managers, are jumping in. Today, companies looking to enter the space have multiple options: build an ETF from scratch, acquire an issuer, partner with an ETF provider, convert a UCITS fund into an ETF, or create an ETF share class in an existing UCITS. Luxembourg’s flexible regulatory framework permits UCITS funds to create ETF share classes, an advantage not necessarily afforded to other countries – for example, asset managers in the US face regulatory hurdles in receiving approvals to allow a dual share class structure.

Cheap(er) and transparent

Active ETFs tend to be cheaper than actively managed UCITS due to their more efficient structure, lower trading costs, tax advantages and not requiring the same level of administrative oversight. According to Morningstar, the average fee of active ETFs (0.65%) is 36% cheaper than that of the average actively managed mutual fund⁶. Unlike mutual funds, active ETFs are also known for being more transparent – their ability to trade on an exchange enhances their transparency.

As the active ETF market grows, we expect the entrance of more players and market consolidation to pick up – we are already seeing major asset managers begin to acquire alternatives players with the goal of launching or expanding their ETF lineup. Active ETFs are certainly becoming a dominant force, offering investors a cost-effective and flexible alternative to traditional UCITS.

EY regularly publishes research on ETF development. Read our first article in our ETF series: The active ETF window: Luxembourg’s golden opportunity. For a detailed look out at our newly launched technical analysis into the accelerating ETF market, read our article How ETF trends are shaping market growth and innovation for 2025.