U.S. ETF Midyear Report: Structural Shifts and Active Solutions

U.S. ETFs delivered a defining performance in the first half of the year. Flows surpassed $1 trillion at the fastest pace on record, putting 2026 flows on track to be 35–40% higher than in 2025. One ETF even surpassed the $1 trillion AUM threshold, proving that the market can handle funds of such scale. These stats reinforce that ETFs have become the default implementation vehicle for retail and institutional portfolios alike, utilized for everything from strategic exposures to tactical adjustments.

With the second half of the year having begun, positioning suggests three themes are steering asset allocation: volatility, concentration and diversification. We expect ETFs will continue to serve as a primary toolkit for investors to manage each of these forces in transparent, liquid and scalable ways.

1) Volatility is the regime - not the exception - and active ETFs are a solution

The S&P 500 is up 10% this year, but its path has been choppy.¹ Much of the volatility falls into two buckets: AI sentiment swings and geopolitics. On AI, markets contended with an ongoing tug‑of‑war between concerns about hyperscaler ROI and still-resilient fundamentals. The Iran conflict was the dominant geopolitical narrative in the first half, which initially triggered a sharp drawdown (roughly 8% at its worst) before a rebound as investors began to price in a resolution.

The market stress further highlighted the ETF ecosystem’s role in repositioning. When the Iran conflict began, for example, ETF exchange volume hit its highest daily level on record, representing 43% of total U.S. exchange activity (vs. a long‑term average of 28%).

Another takeaway is that investors are using active ETFs as both core holdings and satellite/risk-management sleeves. In the first half, 33% of all ETF flows went into active ETFs, pushing active U.S. equity and fixed income flows to the highest levels on record.

2) Concentration risk is front and center—the AI story is a big part of the why

Benchmark concentration remains a core portfolio challenge. The technology sector now comprises almost 40% of the S&P 500, while the smallest five sectors together account for roughly 13%, a setup that can leave portfolios highly sensitive to a narrow set of outcomes. Similarly striking, the S&P’s top 10 constituents make up a staggering 40% of the index.² However, performance broadened meaningfully, with the Magnificent 7 down 2% the first half of the year and the remaining 493 constituents up 14%.³

The AI investment cycle has amplified concentration risk. As investors try to “own the buildout,” flows have disproportionately favored the same parts of the market that already dominate cap-weighted benchmarks. We believe navigating the potential opportunities—from AI infrastructure to the end users poised to benefit, is a task best accomplished with an active manager.

Also, recent index rebalances and methodology changes have altered how companies are classified as value or growth, carrying significant implications for the trillions of dollars benchmarked to these indices. This dynamic creates something of an “index soup” – an unpredictable bowl of potentially overlapping exposures and complicated rules. It’s another reason why incorporating active management can add a vital layer of risk management to a portfolio, as managers can select companies based on favorable long-term fundamentals rather than their market-cap. 

For investors, the framing is straightforward: concentration risk isn’t solved by abandoning the AI theme. Instead, it requires being more intentional about how it’s accessed—balancing broad exposure with diversified or actively managed approaches capable of capturing AI broadening beyond mega caps.

3) Diversification is back across style, asset class and geography

First-half performance reinforced that diversification is a practical risk-control tool rather than a mere slogan.

• Equity style: As enthusiasm and headlines around AI continue this year, flows into the large growth segment have been nearly equal to flows into the large value segment.⁴ Yet many investors may not have noticed that value has quietly and decisively outperformed growth, with the Russell 1000 Value beating the Russell 1000 Growth by 10.9 percentage points.⁵ As market breadth widens, ETFs across styles can help reduce concentration risk as leadership rotates.
• Asset class: Fixed income ETFs continue to punch above their weight, capturing nearly 30% of ETF flows so far this year as investors look for income and portfolio ballast. Active fixed income ETFs are capturing a larger share of that demand, representing roughly 37% of fixed income flows, while total fixed income inflows are on pace to exceed last year’s level by about 25%. Ultra short bond and intermediate core strategies account for almost 45% of fixed income ETF flows, reflecting a continued emphasis on liquidity, capital preservation and stability.⁶
• Geography: International and emerging market equities started the year strong, outperforming the U.S. by roughly 125bps and 1380bps, respectively.⁷ Flows suggest continued interest in reducing U.S. concentration risk, with notable demand for emerging markets. Even as overall flows have cooled recently, active international ETFs remain relatively sticky, pointing to a more deliberate, allocation-driven approach to global diversification rather than a short-term tactical trade.
   
• Thematics: After several years of crowded launches and shrinking assets, thematic ETFs are resurging. AUM increased by nearly 33% in the first half to about $430billion, with inflows tracking the second-highest annual total on record.⁸ AI is accelerating the burst in thematics as it is not a sector exposure, but a cross-cutting series of innovation spanning robotics, EVs and data infrastructure. To that end, what qualifies as “thematic” continues to evolve as yesterday’s niche becomes today’s mainstream allocation (e.g., space and memory). In a category where narratives can outpace fundamentals, selecting the right theme – or active manager – matters more than ever.

What to expect in the second half of 2026

We expect volatility, market concentration and diversification to keep driving ETF usage, with active strategies commanding a larger share of the flow pie. In practice, investors likely stay allocated to secular growth themes, AI included, while using ETFs to manage concentration risk and diversify through value-oriented exposures, fixed income and international strategies.

We’re also tracking an important structural trend: ETF growth is increasingly fueled by the migration of assets from legacy vehicles into the ETF wrapper, not just organic inflows. After early momentum from mutual fund-to-ETF conversions, Separately Managed Account (SMA) conversions have accelerated, positioning ETFs as a preferred “operating system” for implementation and advisor workflows. Looking ahead, potential ETF share-class conversion pathways, such as exchange privileges, could advance this shift. In our view, the trend is clear: more strategies delivered via ETFs, more assets consolidated in the wrapper and broader standardization around ETF implementation.