By Jack Pitcher

Investors' newfound appetite for actively managed funds is helping the investing industry stall a brutal race to the bottom on fees.

After grinding lower for years, the asset-weighted average expense ratio for exchange-traded funds crept higher in 2024 and 2025, according to FactSet data. That is because active funds that command relatively higher fees are fast gaining market share.

ETFs have long been associated with low-cost passive investing, and the decadeslong rise of follow-the-index strategies -- along with tax advantages -- has helped them overtake mutual funds as the dominant vehicle for new investment dollars in the U.S.

Actively managed strategies that don't just track an index made up a negligible portion of total ETF assets just five years ago, but a regulatory change that made it easier to launch funds of all kinds has quickly reshaped the market.

Passive investing has never been cheaper. Vanguard's S&P 500 fund -- which has nearly $1 trillion in assets -- charges a fee of 0.03%, or $3 annually for every $10,000 invested. To combat extremely low fees that require huge scale to turn profits, money managers are making an aggressive push to grow their active strategies.

A record 1,100 new ETFs launched last year, and more than eight in 10 of those were active. Active funds took in 32% of the $1.4 trillion in new money invested in U.S. ETFs in 2025, up from 9% in 2021. Through the first quarter of 2026, momentum is even stronger, with active inflows up 70% from a year earlier to a record, according to ETFGI.

"ETFs have become somewhat commoditized on the passive side," said Michael Hunstad, president of Northern Trust Asset Management, which manages $1.4 trillion. "But the active space is really about strategy and performance. If you have a creative strategy and great performance, that's still very differentiating, and investors are less fee sensitive."

Active management doesn't just refer to traditional stock- and bond-picking funds. ETFs that use derivative contracts to blunt volatility, create extra dividend income, or protect against losses past a defined point, have soared in popularity with financial advisers. Advisers are looking for ways to protect assets and generate income for their retired baby boomer clients, the largest and wealthiest generation in history.

Such funds have trade-offs, and some analysts have questioned their value compared with a traditional portfolio of stocks, bonds and cash. But their popularity with investors is undeniable and has been a boon to managers like J.P. Morgan Asset Management, an early adopter of derivative strategies.

The firm's blockbuster active fund, the JPMorgan Equity Premium Income ETF, charges a 0.35% annual fee. It is the largest actively managed ETF, with some $45 billion in assets under management, but earns revenue comparable to some index funds that are 10 times its size.

Growth of active funds is also helping BlackRock increase the average fee it earns on new money coming into its predominantly passive iShares ETF business, the industry's biggest, executives said on last month's earnings call.

BlackRock and other managers are growing their active funds in part through their model portfolios, or preset investment templates that money managers design for financial advisers to follow.

In March, BlackRock added its iShares Large Cap Core Active ETF, a concentrated stock-picking fund that had just $100 million in assets, to one of its widely followed model portfolios. The fund, which has an expense ratio of 0.38%, soared to more than $5 billion in assets in under two months, pulling in more money than any other active ETF in March.

"That money moved from IVV, which is their S&P 500 index-based product," said Todd Rosenbluth, head of research at VettaFi. "Either on their own or through model portfolios, investors are increasingly choosing active alternatives."

The active BlackRock fund has outperformed the S&P 500 by about 15 percentage points since its October 2023 launch.

Active funds are significantly more lucrative for investment managers, accounting for a record 28% of ETF revenue in the first quarter despite making up 11% of total assets, according to Bloomberg Intelligence.

Still, the fees pale in comparison to the mutual-fund glory days, when many funds charged 1% of assets or more. Increased competition is likely to drive active ETF fees lower, even if the growth of active funds continues to increase average ETF fees overall, analysts said.

The asset-weighted average fee for active mutual funds is about 0.6%, while active ETFs charge 0.4%, according to Morningstar. Mutual funds have posted net outflows over the past decade as new money goes to ETFs instead. After years of holding out on active ETFs amid fears of cannibalizing existing, higher-fee strategies, many managers are starting to relent.

"Legacy asset managers who held back in entering the ETF space are finding themselves with a hard trade-off between protecting fee yields on existing products or attracting new flows," said Elisabeth Kashner, director of global funds research and analytics at FactSet.

Write to Jack Pitcher at jack.pitcher@wsj.com

(END) Dow Jones Newswires

May 04, 2026 11:45 ET (15:45 GMT)

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