Masters in Business

At The Money: How Big Can Active ETFS Get?

October 22, 2025

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  • The ETF space is shifting from being dominated by large, cheap, passive index funds to a growing segment of active, niche, and often costlier ETFs, exemplified by the success of brand-name managers like Cathie Wood, Dan Ives, and Tom Lee. 
  • While the rise of active ETFs is healthy for the overall ETF industry by offering more exposure options in the wrapper, individual investors face the challenge that active managers, as an industry, historically underperform passive benchmarks. 
  • Active ETFs utilizing complex strategies like options, futures, or illiquid alternatives (private credit) are often classified as 'active' for mechanical reasons (like rolling swaps) rather than true discretionary stock-picking, and these complex products require intense investor scrutiny regarding costs and risks, such as volatility laundering. 

Segments

Rise of Active ETF Managers
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(00:01:53)
  • Key Takeaway: The growth of new ETFs is primarily in active management, moving beyond the traditional low-cost, passive index focus established by firms like BlackRock, Vanguard, and State Street.
  • Summary: The ETF landscape is seeing an explosion in active launches in off-the-beaten-path areas, contrasting with the historical dominance of passive index funds. Superstar managers like Cathie Wood (ARKK) initiated a resurgence of active management visibility, followed by figures like Dan Ives and Tom Lee attracting billions. This trend suggests a move toward having most investment exposures available within an ETF wrapper.
Active Management Performance Reality
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(00:06:03)
  • Key Takeaway: Despite the popularity of brand-name active managers, the mathematical reality is that active managers categorically underperform over time, with 90% underperforming over a 10-year horizon.
  • Summary: For the individual investor, picking the right active manager at the right time is a difficult endeavor, as the industry average shows consistent underperformance. Half of all active managers underperform in any given year, rising to 80% over five years and 90% over ten years based on mutual fund data.
Active ETF Transparency Debate
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(00:07:00)
  • Key Takeaway: Semi-transparent active ETFs use ‘kludges’ like T-Price’s T-CHIP strategy to withhold daily holdings, a feature that benefits asset managers by preventing front-running but offers no direct benefit to the individual investor.
  • Summary: Active ETFs can employ semi-transparent structures to protect managers’ trading strategies from being front-run, which is the industry argument for less disclosure. However, the expert argues that if a strategy requires obfuscation to avoid market impact, it likely does not belong in the highly liquid ETF structure, suggesting closed-end funds are better suited for niche, illiquid strategies.
Mechanical Active and Options ETFs
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(00:10:11)
  • Key Takeaway: Many ETFs involving options, futures, or leverage are classified as active management primarily for mechanical reasons, requiring human oversight for rolling contracts, rather than reflecting discretionary manager decision-making.
  • Summary: Leveraged and options-based products are often labeled active because automating the constant repricing and rolling of derivatives is difficult, necessitating a trading desk to execute these tasks. These ’name-only active’ funds carry higher costs legitimately due to the required trading desk infrastructure.
Illiquid Alts in ETF Wrappers
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(00:11:48)
  • Key Takeaway: Private equity, credit, and debt are beginning to appear in ETF wrappers, but these products remain untested in market downturns, raising skepticism about liquidity management when many investors seek redemptions.
  • Summary: State Street has launched products like PRIV, which hold relatively straightforward private credit, offering only a marginal yield increase over public junk bonds. The primary concern is how these vehicles will perform during market stress, especially if a significant portion of the illiquid assets must be sold when the only buyer is the issuer.
Crypto and Tokenization Future
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(00:13:53)
  • Key Takeaway: The success of crypto ETFs like BlackRock’s 25-bit fund signals increasing accessibility for average investors, but true tokenization of equities, allowing direct peer-to-peer security transfer, requires significant legislative change.
  • Summary: The SEC’s stance is making major cryptocurrencies available in ETF sleeves, which will enable portfolio managers to build indices of individual coins. Long-term, true tokenization could replace the NYSE ledger system for ownership transfer, but this requires legislation, meaning the near-term step will likely be ‘wrapped’ tokens held in trust pools.
Settlement Speed vs. Recourse
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(00:17:08)
  • Key Takeaway: While tokenization theoretically enables T+0 (instantaneous) settlement, market structure deliberately incorporates delays (like escrow) to provide necessary recourse and protection against errors or bad actors, making instantaneous settlement potentially undesirable for large transactions.
  • Summary: The move from T+3 to T+1 settlement highlights the industry’s gradual approach to speed. Instantaneous settlement (T+0) removes crucial safety mechanisms like escrow and secondary inspections that protect against fat-fingered trades or spoofing incidents, which is why many market participants favor built-in friction.
Volatility Laundering Explained
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(00:18:22)
  • Key Takeaway: Volatility laundering involves complex option strategies, such as those in MSTY, that generate high distributions by selling volatility to other market participants, effectively exposing the investor to the risk of the underlying asset collapsing.
  • Summary: Volatility laundering is the process of moving volatility risk from one bucket to another while charging a fee. Products promising high distributions often use synthetic long positions combined with synthetic covered calls, returning capital to create the high payout stream. Investors picking up these distributions are essentially selling volatility and are exposed to the risk of the underlying security collapsing.
Final Scrutiny for New ETFs
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(00:19:35)
  • Key Takeaway: Investors must apply the same common sense and scrutiny to new, exotic ETFs as any other financial product, carefully weighing the higher costs against the performance of plain vanilla passive indexes.
  • Summary: Investors must understand the product’s mechanics, risk profile, and costs before investing in new, exotic ETF structures. The key decision is whether the potential benefits of these products justify paying 75 to 125 basis points more than a standard passive index fund.