Myth busting #5: Active ETFs fail to deliver in well-established markets such as the United States

Why are active ETFs viewed as less effective in mature markets?

Many investors believe actively managed ETFs are less effective in mature markets like the United States, where fewer opportunities exist to exploit inefficiencies and outperform benchmarks. 

The belief is rooted in:

1) The absence of information advantage: The idea that in established markets, prices already reflect the abundance of information, leaving little room for active ETFs, that blend the features of active management with the efficiencies of an ETF, to add value. 

2) The lag in performance: The lag in performance: The myth is bolstered by data that shows nearly two-thirds of active large cap funds have lagged the S&P 500 Index over a three-year period and more than 85% of the funds have underperformed the US benchmark over a 5-and 10-years as of 30 June 2025¹.

3 reasons why active ETFs have the potential to generate alpha.

A closer look at market performance reveals that the selection of the manager may be crucial. For instance, 94% of active equity ETFs and 96% of active fixed income ETFs issued by J.P. Morgan Asset Management have outperformed their peer median over a three-year period as of 31.10.2025².

Here are the reasons:

1) Fundamental research: Active ETFs typically rely on in-depth research and analysis to select securities with strong growth potential or undervalued assets. It can also exploit inefficiencies that persist due to reasons such as behavioural bias, and technological disruptions.

For instance, the seven tech companies that dominate the S&P 500 Index now, held only an 11.15% market cap share in the index back in 2015. That share is now around 35%³. Such concentration, where a small number of constituents influence performance, may also increase vulnerability to sector or company-specific downturns. Besides investors may also miss out on the emerging opportunities.

In fact, three tech firms outside the top seven (by market value) saw greater percentage increases in share price in 2025³.

2) Potential to go beyond the benchmark:  Actively managed ETFs have the potential to uncover opportunities beyond those represented in standard benchmarks, which tend to concentrate on the largest and best-performing stocks or bonds. 

For instance, in fixed income, the Bloomberg US Aggregate Bond Index  captures only about 51% of the US public bond universe as of 31.12.2025. It does not have any exposure to securities such as high-yield corporate bonds and non-agency mortgage-backed securities. Asset-backed and agency mortgage-backed securities have only limited representation, and a significant portion of the securitised market is excluded⁴.

3) Flexibility: Active ETFs offer real-time trading, transparency, and liquidity, combining the features active management and ETFs. Given they are actively managed by the portfolio manager, they can quickly adjust portfolios in response to market events as they are not constrained by the index rules.

Indexes are rebalanced only at periodic intervals-- usually quarterly or semi-annually-- and may result in missed opportunities to respond promptly to market shifts. 

Conclusion

As the ETF market continues to develop, active strategies are gaining prominence, drawing 32% of all ETF inflows, and representing 83% of new product launches in the US in 2025⁵.

While active ETFs present innovative avenues for achieving financial objectives—even in highly developed markets—investors should conduct thorough due diligence and select active ETF providers that align with their portfolio goals and risk tolerance.