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 period of volatility and certain strategies have thrived during such times. In the second edition of our Guide to ETFs-Asia, 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.
Scale matters for active ETFs
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.
While active ETF assets and new launches have continued to grow, a closer look at the data reveals achieving scale in active ETFs requires more than just market presence. There are 2,842 active ETFs globally across equity and fixed income strategies but only a handful have managed to attract annual flows of over US$500 million4.
While the cohort attracting over US$500 million in annual flows has steadily increased over the past five years, it remains well below 5% globally. In fact, the count exceeded 100 for the first time in 2024, although this only represented 4.7% of all available active ETFs4.
This suggests that while launching active ETFs is easier today, attracting significant inflows requires strong portfolio management, effective distribution, marketing and more.
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.
Although markets have continued to support the growth of active ETFs, a closer examination of the data reveals that not all are equal. Achieving scale in the market requires more than just launching products.