Active ETFs are driving a shift in investment strategies, with managers launching record numbers of costlier funds in 2025. The asset-weighted average expense ratio for ETFs increased in 2024 and 2025, according to FactSet data, reversing years of declining fees. This trend reflects investors’ growing preference for actively managed strategies, which now hold a larger market share than passive alternatives. 2025 launches alone account for over 60% of new ETFs, per industry reports, signaling a seismic shift in investor behavior.

The reversal of fee declines began as active funds gained traction, particularly in sectors like equity derivatives and thematic investing. FactSet data shows active ETFs now represent 45% of total ETF assets, up from 38% in 2023. This shift matters because higher fees could erode long-term returns for retail investors, though institutional clients increasingly prioritize active management for alpha generation. Analysts note this marks the first sustained fee increase since 2018.

While critics argue the trend risks fragmenting the ETF market, proponents see it as a necessary evolution. Market share gains for active funds coincide with regulatory changes easing compliance burdens for active managers. For example, the SEC’s 2024 streamlining of Form N-PORT reduced administrative costs, enabling firms to pass savings to clients—or absorb them into fee structures. This development underscores a broader realignment in how investors value human expertise versus algorithmic efficiency.

The expense ratio climb isn’t uniform: leveraged and inverse ETFs saw the steepest hikes, up 12% year-over-year. However, core equity active strategies maintained modest growth, averaging 2.1% fee increases. Investors should monitor how this affects portfolio construction, particularly for tax-sensitive accounts where compounding fees matter most. As one fund manager put it: "The race to the bottom is over—now we’re building for quality."