Active ETFs Cut Fees to Boost Odds of Outperformance

Investment Comments Off on Active ETFs Cut Fees to Boost Odds of Outperformance

Lower expense ratios matter, but the ETF wrapper adds another layer of decision-making for active strategies. Investors are not just buying a manager’s stock-picking or bond selection skill; they are also buying daily tradability, creation/redemption mechanics, and the way those mechanics can affect taxes and trading behavior. For long-term holders, that means the vehicle itself can influence after-fee outcomes, not just the strategy inside it.

Tax efficiency is one of the most important structural differences to watch. Active ETFs can use in-kind creations and redemptions, which may help reduce capital gains distributions relative to many mutual funds. That does not eliminate taxable events, and it does not guarantee a smoother experience, but it can make the structure better suited to investors who prefer to control when gains are realized.

Liquidity and execution also deserve attention. An ETF can trade all day, but the quality of the investor experience depends on the underlying holdings, the bid-ask spread, and how easily the portfolio can be created or redeemed. For active funds with less liquid securities or higher turnover, this relationship between portfolio design and trading costs becomes especially relevant.

For portfolio construction, active ETFs are often best viewed as deliberate satellites rather than core replacements. They can be useful when an investor wants active judgment in a specific market segment, but the allocation should still reflect concentration risk, benchmark dependence, and the possibility of manager underperformance. In other words, the wrapper may improve implementation, but it does not remove the need to assess the strategy itself.

Active ETFs are gaining traction with investors as lower fee structures improve the odds that fund managers can outperform passive benchmarks, according to a recent Morningstar report. The average active ETF charges 40 basis points less than the average mutual fund, giving managers a lower hurdle to clear when trying to beat their benchmarks, according to a recent report published by Bryan Armour, director of ETF and passive strategies research at Morningstar. Only 21% of U.S. active funds survived and beat their average passive peer over the decade through June 2025, according to Morningstar’s Active/Passive Barometer cited in the report. The fee advantage matters because active managers are expected to earn the market return minus fees. Active ETFs carry an equal-weighted average expense ratio of 0.63%, while mutual funds average 1.02%, according to the report. When weighted by assets, ETFs charge 0.40% compared to 0.58% for mutual funds.

Lower Fees Drive Results

The T. Rowe Price International Equity ETF (TOUS) highlights this cost advantage. The fund charges a 0.50% expense ratio and has attracted $815.4 million in flows year-to-date, according to ETF Database. More than 1,300 active ETFs have launched since the start of 2024, according to the report. Beyond lower fees, active ETFs offer greater tax efficiency through in-kind creations and redemptions, which helps funds avoid triggering the capital gains distributions that plague mutual funds, according to the report. Active ETFs also benefit from lower trading costs and insulation from buying and selling by other investors in the fund, according to the report. These structural advantages position active ETFs to deliver better success rates against passive benchmarks than their mutual fund predecessors.

https://www.etftrends.com/active-etf-content-hub/active-etfs-cut-fees-boost-odds-outperformance/

Enjoyed this article? Sign up for our newsletter to receive regular insights and stay connected.