Active ETFs gain market share, grow in number

As market participants demand more bespoke options, the number of active muni exchange-traded funds launched has outpaced that of passive ETFs for the past several years.

"Active ETFs are becoming the preferred way investors access muni bonds, reflecting a broader structural shift away from traditional mutual funds," said James Pruskowski, managing director at Hennion & Walsh.

"What started as a gradual evolution in packaging has accelerated into a meaningful rerouting of flows as advisors and platforms standardize on ETF-based model portfolios," he said. "This is not a change in belief about active management, but a change in how investors want to access it, through vehicles that are more tax-efficient, more liquid and easier to implement in modern advisory platforms."

Since 2020, more active ETFs have been created than passive ones, per Morningstar Direct data.

Last year, 23 active ETFs launched, more than the nine passive ones. And while the first quarter of the year bucks the trend as one active ETF launched compared to three passive ones, things could change the rest of the year.

Active ETFs have generally proven that even after expenses, they can ? and have ? outperform passive ETFs, the latter of which has been an efficient way for people to get to exposure in the market without a significant cost, said Greg Gizzi, head of fixed income and municipal bonds at Nomura Asset Management International.

Oftentimes, the bid-ask spread on ETFs is attractive relative to "when you get into the marketplace and you're trying to try to sell cash bonds," he said.

However, a growing number of firms have entered the active ETF space, and the share of flows taken by active ETFs is growing.

It was only over the last several years that the number of surviving active ETFs has surpassed that of surviving passive ETFs.

Currently, there are 110 active ETFs compared to 56 passive ETFs, Morningstar Direct data shows.

However, the total net assets for passive ETFs is more than double the AUM for active ETFs. Passive ETFs have $133.991 billion of total net assets, or 69.5%, compared to active ETFs with $61.531 billion, or 30.5%, the data shows.

Compared to passive ETFs, active ones are a bit more tactical in their approach to credit stories. Active managers are generally more successful at identifying credit opportunities in the space and targeting them for investment, said Chris Brigati, managing director and CIO at SWBC.

Furthermore, it makes sense for managers to launch active ETFs because it helps mitigate the risk of overcrowding, said Pat Luby, head of municipal strategy at CreditSights.

Giving the portfolio manager the flexibility that comes with active management is a smart thing, he said.

Several years ago, some predicted the death of the mutual fund market because of the explosive growth of ETFs, Luby said.

Additionally, anecdotally, money has been flowing out of mutual funds and into ETFs and separately managed accounts.

Mutual funds and ETFs both saw increased muni holdings in 2025, but ETFs are growing at a faster rate, according to the latest Federal Reserve data.

Muni ownership of ETFs grew to $184.5 billion in 2025, up 33.8% year-over-year, far outpacing the 4.4% growth of mutual funds to $836.5 million over the same period, the data shows.

"Mutual funds remain widely used, but the friction is harder to ignore," Pruskowski said.

"Taxes, trading costs, and timing matter more in today's market, and mutual funds are structurally disadvantaged with once-daily pricing and potential capital gain distributions," he said.

In munis, that gap is especially meaningful, resulting in less "a shutdown story and more a conversion story, as strategies migrate into ETF wrappers that better match current portfolio construction," Pruskowski said.

Retail investors want greater transparency and to see daily transactions, even if it's less liquid, making ETFs more appealing than mutual funds, said Mikhail Foux, managing director and head of municipal research and strategy at Barclays (BCS).

Additionally, ETFs are cheaper in terms of management. ETFs don't have to pay 12b-1 distribution fees, he said.

Aside from those exceptions, Foux said, mutual funds and ETFs are not that different.

Market participants concurred the number of new active ETFs may slow as many fund complexes have already entered the market and there's a limit to how many can be launched, to some degree.

However, as long as the demand side keeps commanding desire for them, they'll keep issuing new ones that may be more specialized or targeted, Brigati said.

"We expect [fewer] new active ETFs to be launched as most fund complexes have already done so," J.P. Morgan strategists said. "However, we don't anticipate the flow into active ETFs will slow down."