Markets have zigged and zagged through 2025, with the second quarter witnessing elevated volatility¹. Factors such as uncertainty amid tariff negotiations, diminishing consumer confidence and fears over weakening global economic growth have weighed on investor confidence. Yet, market moves have highlighted the merits of staying invested, as the MSCI All Country World Index – a gauge of global stocks – has gained over 4% in the first five months of the year, bouncing back from a 12% year-to-date decline in early April².

While investors should align portfolios with their risk tolerance, ETFs have shown their ability to provide liquidity during periods of volatility and certain strategies have thrived during such times. In the second edition of our Guide to ETFs- Australia, we showcase one such strategy and illustrate why size matters when it comes to active exchange-traded funds (ETFs).

The Guide provides actionable insights and resources for financial professionals and investors, highlighting industry trends, guidance on portfolio construction, and trading best practices.

Trading volatility with ETFs and Equity Premium Income solutions

Volatility has climbed this year with moves pronounced in April, when the CBOE Volatility Index (VIX) – a measure of equity market volatility – reached multi-year highs¹. While periods of elevated volatility are not uncommon, it does present a challenge for investors looking to shield portfolios from the market risks.

During such times, investors tend to grapple between retreating to cash in the form of Treasuries or seeking strategies that can help manage downside risks. For the latter, the preference is for liquid strategies or vehicles.

ETFs have time and again demonstrated the ability to provide liquidity to the market during times of volatility or market stress, even exhibiting greater liquidity than the underlying holdings supporting the market and investors³. This was apparent in April, when ETF trading as a percentage of equity trading soared above its 15-year average of 28% for nearly four weeks³. 

As volatility rose, ETFs with option overlays stood out, in terms of flows⁴. The category continues to attract investors with its lower volatility and potential to generate additional income. Typically, these ETFs sell call options to generate additional income via option premiums and distribute these proceeds regularly⁵. Option premiums tends to increase when volatility rises. This, alongside dividends from the underlying equity portfolio, may help manage downside risk and buffer portfolios from price fluctuations⁵. It’s little wonder that this category of ETFs has caught the attention of investors seeking a more defensive approach to investing at a time of high volatility.

Active ETF growth continues

Australian ETF volumes have continued to grow, with assets under management in touching distance of the A$200 billion mark as of 30.04.2025⁶. As illustrated below, the share of ETFs in the Australian investment landscape stood at 7.6% as of 30.04.2025, compared with 2% at the end of 2015 and 4.2% in 2020. In addition, active ETFs have continued to dominate growth in line with global trends. 

Active ETFs are steadily gaining popularity globally with the vehicle increasing its share of all ETF flows from just 7% in 2019 to 28% in the first four months of 2025, as seen in the chart below.  Asia Pacific is also the fastest growing region, recording a 53% compounded annual growth rate in the past decade, above the global average growth rate of 43%³.

Growth has been propelled by investor demand for active management in an ETF structure. Active ETFs blend features such as fundamental research, stock selection and portfolio construction with the qualities of an ETF, including daily transparency, intraday liquidity and lower costs.

Conclusion

Market volatility in 2025 has highlighted the importance of employing appropriate investment strategies and vehicles to maintain exposure, manage downside risk, and achieve long-term objectives. ETFs have once again demonstrated their ability to provide liquidity during periods of market stress, while strategies such as active ETFs with option overlays have shown they have the potential to enhance portfolio resilience.