Head of U.S. ETF Capital Markets
Efficient access to more markets and investment strategies than ever before
ETFs have consistently offered efficient, direct access to broad market exposure. With the technological advances that have fueled online brokerages, adding or decreasing exposure to the entire US stock market is as easy as buying or selling an S&P 500 ETF at any time during market hours.
The ETF market has expanded so significantly over the past several decades that it now offers investors ample choice to build a diversified portfolio that suits their individual needs, including assets that are harder to access or views that are more challenging to express.
U.S. ETFs have grown at an 23% CAGR over the past five years (Exhibit 1), resulting in a universe of over 4,000 listed ETFs in the U.S. that spans 121 Morningstar categories across asset classes, regions, market capitalizations and investment management styles. ETFs now outnumber publicly traded companies. Increasingly, ETFs are offering investors the ability to own a wider variety of assets, including those that can be harder to access, such as gold or even digital assets.
The number of ETF issuers has also grown to over 400. Given relatively low barriers to entry, we expect the number of issuers to continue to grow, fueling continued innovation and competition across the broad ETF universe.
Active ETFs are altering the landscape
Innovation in ETFs is already changing the investment landscape. First, ETFs have been steadily taking shares from mutual funds in the U.S. for the past decade and now account for 34% of the $32.8 billion of U.S. fund assets under management (AUM) vs. 66% for mutual funds; a significant increase from just 14% in 2014 (Exhibit 2).
The explosive growth in actively managed ETFs is further altering the market and the entire fund investing landscape. Since the first active ETFs were launched in 2008, the product offering, fund flows and AUM have grown rapidly and significantly.
Just as ETFs have taken share from mutual funds, active ETFs have taken share from passive ETFs in several important ways. First, the 2,294 active ETFs in the market has boosted the total market share (by number of products) of active ETFs to 55% in 2025 (Exhibit 3), topping passive for the first time. At the same time, flows into active ETFs have increased to 37% of ETF flows in 2025; this significant increase in flows comes largely at the expense of active mutual funds, where flows have declined dramatically in recent years as active ETFs gain traction.
The cost-effectiveness of ETFs is increasingly relevant
The ease of access to an ever-growing universe of investment strategies and markets is a key factor driving investors toward both active and passive ETFs. However, another major reason investors are increasingly choosing ETFs is the lower costs vs. comparable mutual funds.
As the first wave of passive ETFs hit the market, they provided investors with good substitutes for index funds and offered easy access at a lower cost. The lower fees persuaded many index fund investors to swap into ETFs offering similar market exposure, but the impact on actively managed mutual funds was limited because investors remained willing to pay for the value of active management.
The rapid expansion of active ETFs has changed that equation. Investors value attributes offered by the ETF structure, such as transparency and tax efficiency, and active ETFs are typically offered at a lower cost than comparable active mutual funds. As a result, the total costs of using ETFs vs. mutual funds in a portfolio is becoming a significantly more relevant consideration for investors as the number of active ETF offerings grows.
On the whole, ETFs are offered at a significantly lower cost than mutual funds. Average ETF fees, on an equal-weighted and asset-weighted basis, are less than half of mutual funds fees.1 Since 2015, the equal-weighted average fee for new ETFs rose by 11% while the average fee for new mutual funds declined by 22%.2 The fee gap has narrowed largely due to higher fees for active ETFs vs. passive ETFs and pressure on mutual fund fees. However, newly launched ETFs are still less expensive than new mutual funds.3
A closer look at ETF and mutual fund fees
Looking at average fees for mutual funds and ETFs is helpful to gain an understanding of the general direction of costs. These analyses are usually based on the expense ratio, a common annual fee expressed as a percentage of assets that covers management, administrative and operational costs. The fees for some mutual funds and ETFs are now so low that they may also be quoted in basis points. Mutual fund expense ratios may also include ongoing marketing and distribution costs (known as 12b-1 fees) and additional service fees.
However, beneath the average expense ratios, the fees within both the mutual fund and ETF universes vary significantly; they also do not account for some additional costs that can impact the total cost of investing. It is helpful to consider the costs of investing in mutual funds and ETFs in the context of some general observations about the key drivers:
- Passive funds have lower fees: Passive mutual funds and passive ETFs are both relatively inexpensive vs. active funds in the same asset classes or market segments (Exhibit 4).
- Active funds have a wider range of fees: Both active mutual funds and active ETFs have a wider range of fees, which are typically a function of the fund strategy, asset class and underlying universe.
- Underlying universe significantly impacts fees: Funds that operate in broader, more liquid markets, such as the S&P 500, tend to have lower fees than funds investing in more narrow or less liquid areas, such as small cap emerging market equities, digital assets or gold. This observation holds for passive and active strategies across both mutual funds and ETFs.
- Extra costs differ for mutual funds and ETFs: Mutual funds may charge sales loads and redemption fees. Extra costs related to ETFs may come from:
- Trading commissions
- The bid-ask spread, which is the difference in the price to buy and sell ETF shares. This is likely to be small for a U.S. large cap equity ETF and larger for a more specialized ETF, such as small cap emerging market stocks. Secondary market volume in the ETF shares can also impact the width of the bid-ask spread; typically, as the average trading volume in the ETF grows, the bid-ask spread narrows.
- Trading at a premium/discount to net asset value (NAV), which can be more prevalent in ETFs that contain securities that do not trade concurrently with the U.S. market, or in fixed income ETFs, where NAV is struck at the bid side of the underlying basket of bonds. Investors should consider the consistency of the premium/discount when assessing ETF costs.
Clearly, many factors contribute to the total cost of investing in ETFs or mutual funds, but ETF investors can draw several key takeaways. First, passive ETFs will generally be the most cost-efficient option and will likely compare favorably with similar passive mutual funds. When looking at active ETFs, those in larger, more liquid markets or asset classes are also likely to be less expensive than comparable active mutual funds. However, when considering investments in narrower or niche areas of the market, investors should look carefully at the potential for additional costs—in the form of extra mutual fund fees, larger bid-ask spreads or deviations from NAV for ETFs.
Conclusion
The growth and innovation in ETFs are changing the entire fund investing landscape. ETFs are providing investors with significantly more options to access markets and asset classes and express investment ideas—especially with the growth of active ETF offerings—and they come with numerous benefits, including generally lower costs.
The low cost of passive ETFs has helped reduce mutual fund fees broadly. The rise of active ETFs is adding an important new dimension to fee considerations. Active ETFs tend to be cheaper than active mutual funds, but as investors consider ETFs with underlying assets that are farther away from core asset classes, they should be mindful of the potential for additional trading- and pricing-related costs.
While many nuances in the market exist, the overall trend is clear: the growth of ETFs is increasing investment options while reducing costs for investors.