In her fascinating six-monthly review of the US ETF industry, Elisabeth Kashner reports that, while 2025 is only halfway over, there are signs of an ETF revolution brewing.
“Fund flows are upsetting the longstanding industry order and challenging the value proposition that made ETFs outrageously successful,” she writes, reporting that only two of 2024’s top ETFs garnered flows beyond their starting market share (as of 12-31-24, based on FactSet Fund Segment). The other eight lost ground.
The biggest gainers, by flows gap, include iShares 0-3 Month Treasury Bond ETF (SGOV); iShares Bitcoin Trust ETF (IBIT); JPMorgan NASDAQ Equity Premium Income ETF (JEPQ), an actively managed multi-strategy ETF that writes calls on the NASDAQ 100, which is also its investment universe; and iShares U.S. Thematic Rotation Active ETF (THRO), likewise actively managed and which is a recent addition to BlackRock’s model portfolios, Kashner writes.
“Vanguard Total Stock Market ETF (VTI) exemplifies the longtime ETF value proposition. It is passively managed, maximally diversified by virtue of being broad-based and market-cap-weighted, low cost (0.03 per cent/year), and highly liquid (spread of 0.01 per cent).
“VTI and its many counterparts were investors’ answers to the 2008 financial crisis, when actively managed mutual funds and SMAs not only failed to protect investors but also underperformed broad market indexes, Kashner says.
“These disruptors are highly liquid but otherwise are at odds with the historical value proposition.
“Actively managed JEPQ is reasonably priced for an active product (0.35 per cent), but far more expensive than Invesco’s simpler NASDAQ 100 ETF (QQQM, 0.15 per cent). JEPQ holds just 93 stocks, and its top holding, NVIDIA, had a weight of 9.89 per cent as of June 30, 2025.
“THRO, also actively managed, is reasonably priced among broad thematic ETFs at 0.60 per cent, but crazy expensive for an ETF that holds US stocks, predominantly large THRO holds 232 stocks but has the same top holding as JEPQ: NVIDIA, weighted at 8.67 per cent in THRO’s June 30 portfolio.
“IBIT is highly concentrated, as it holds just one asset, bitcoin.”
Kashner questions how this revolution has unfolded, reporting that at the top level, the first half of 2025 seemed like business as usual for the US ETF industry. Inflows of USD558 billion came in on pace to match last year’s record USD1.11 trillion.
Bond ETFs captured one-third of all industry flows, nearly double their starting market share. Ultra-short-term USD investment-grade bonds like SGOV led the pack, posting an annualised organic growth rate of 60.3 per cent.
Kashner writes that investors showed great enthusiasm for non-core asset classes, as 9 per cent of the YTD flows went into commodities (mostly gold), currencies (mostly IBIT), and geared funds.
Equity did not stand out as much, she writes, with half-year flows trending towards merely the third-best year ever. With a starting market share of 78.3 per cent, equity ETFs captured just 57.7 per cent of the H1 flows.
“Drop down one more level, to an ETF’s investment strategy that differentiates it within its segment, and the revolution starts to come into focus. Active management—costlier and more complex than its simple vanilla counterpart—displaced others in both equity and fixed income.”
FactSet Funds defines four general types of investment strategies. Plain vanilla aims to replicate a swath of the market, broad or narrow. Strategic, sometimes tagged as smart beta, uses academically grounded research elements to select and/or weight securities. Strategics include value, growth, dividends, fundamental, and factor investing.
Idiosyncratic ETFs share the complexity of strategics but lack academic rigor. They can be simple equal weighting, single-exchange selection, or ESG, which aims to correct economic externalities.
And then, Kashner notes, there’s active, ‘in which humans select and weigh the portfolio securities’.
“At the mid-year mark, actively managed equity ETFs drew USD110 billion in new assets, not far off 2024’s full-year intake of USD147 billion. That’s 34 cents of every dollar invested in all equity ETFs. Actives comprised just 6 per cent of the equity ETF market at the beginning of the year, rising to 7 per cent by mid-year. This six-fold flows overperformance is a huge pivot for an industry long dedicated to core vanilla products,” she says.
“Within the Strategic group, options strategies—that is, buy-writes and option collars, as employed by JEPQ, for example—grew quickly at an annualized 51.5 per cent rate. Momentum also did quite well. However, this rapid long and short volatility-oriented craze could not offset the tepid interest in value, growth, and dividend strategies. It is easy to imagine that investors may once again be seeking those strategies via active management.
“Vanilla ETFs attracted just 44 per cent of all equity flows, well below the strategy’s 61 per cent starting market share.”
Kashner reports that fixed income saw similar activity, albeit over a longer time horizon and in a less complex landscape, as vanilla strategies have traditionally dominated this asset class.
Year to date, 39 per cent of all fixed income ETF flows went to actively managed products, pushing active’s market share up from 16 per cent on January 1 to 18 per cent on June 30.
2025’s most popular ETFs (YTD to end June) carry expense ratios that are competitive amongst their closest peers but much higher than industry norms, Kashner writes, asking: “Has the ETF consumer become less cost conscious? What has become of the long-term market dynamics of consumers flocking to the cheapest option and asset managers cutting costs in response?
“Discerning shoppers are still pushing prices lower among ETFs that compete directly, in most instances. At the same time, shifts in the overall US ETF product mix are driving changes in the industry’s price tag.
“As a result, mid-year 2025 industry average costs have given back three years of reductions and now sit between 2021 and 2022 levels.”
Kashner then factors in the expense ratio analysis of the asset classes and strategy groups.
Vanilla is the cheapest because cap-weighted portfolios are largely self-adjusting.
Strategic and Idiosyncratic ETFs require significant portfolio adjustments to keep up with their indexes. Accordingly, they cost more than vanilla ETFs, and she writes: “Active management is the most expensive, as it is research-intensive and may also be operationally complex, potentially requiring the portfolio manager to transact directly in securities markets.
The headline cost for US ETFs bottomed out in 2023. An asset-class and strategy breakdown shows how this happened.
“Fixed income, with its greater share of active management, saw its expense ratio hit a low of 13.8 basis points in 2023 and then pop up to 14.4 bps in 2024 and 2025. Equity took a year longer, settling at 15.7 bps in 2024 before creeping up this year by just a hair to 15.8 bps.
“The direction is new and shocking for an industry associated with low expense ratios and fee wars. Investors can still get great deals buying ETFs, benefiting from the dynamics of a competitive market.
“Consider the effect of head-to-head comparisons using both ETF segment and strategy group in which rival ETFs with flows above their market share are called gainers, and those with flows below market share are called losers.
“Investors’ preference for cheaper equity ETFs, a long-held industry core value, shows up most clearly within the Vanilla strategy group, where gainers cost just 0.092 per cent, on average, while losers cost 0.100 per cent. In fixed income, the numbers were even starker: gainers cost 0.071 per cent; losers cost 0.116 per cent.
“This pattern held for strategic equity, plus active and idiosyncratic fixed income. But investors continued their 2024 price insensitivity when it came to active ETFs, paying 0.41 per cent for their preferred funds and abandoning the cheaper options that posted an average cost of 0.36 per cent.
“Price insensitive demand in a landscape known for extreme fee consciousness. There, right there on that 0.41 per cent price tag for active equity funds, is the 2025 ETF revolution.
“As a result, Vanilla, Strategic, and Idiosyncratic ETFs’ prices continued their downward trajectory; Active products swooped upwards.”
Kashner reveals that the revolution has not yet come to active bond ETFs. “Fixed income ETF buyers continue to push each strategy group’s average costs lower, except for Idiosyncratics, which are simply too tiny to matter at just 0.6 per cent of all bond ETF AUM.
“The clash of values showed up in the overall costs for each type of investment strategy in the equity asset class,” she says.
“Active ETFs have reversed the consumer-friendly, low-cost trends that dominated the ETF industry for decades. So far this year, investors have ploughed USD189 billion into these products, contravening the original ETF industry core value and reams of academic and industry research on the negative relationship between investment cost and outcome.
“Vanilla ETFs continue to get cheaper every year. While this strategy group has always been cheaper than average, these days the contrast with other strategy groups is stark. The charts below show each strategy group’s average cost as a percentage of the asset class average—the relative markup or markdown.
“Currently, vanilla equity and fixed income ETFs are on sale at a 33 per cent markdown. Complex passive equity strategies have parallel markups of 32 per cent for Strategics and 42 per cent for Idiosyncratics.
“Active equity and fixed income are far more expensive, with a markup of 143 per cent. Perhaps some of them will make up for the additional cost with exceptional performance,” Kashner writes.
The largest, best known actively managed ETF is the JPMorgan Equity Premium Income ETF (JEPI). JEPI’s universe is the S&P 500, so Vanguard S&P 500 ETF (VOO) makes a suitable performance bogey, she writes.
“So far, JEPI’s results are discouraging. From May 20, 2020 (JEPI’s inception), through June 30, 2025, JEPI returned 75.87 per cent (NAV, total return). During that same period, VOO returned 125.31 per cent.
“Since its launch, JEPI has underperformed the S&P 500 every year except for 2022,” she writes, adding: “Okay, ETF revolution, what else do you have up your sleeve?”
This shift in investor preferences is making a mark on the issuer landscape, as the Big Three vanilla ETF providers, namely Vanguard, BlackRock, and State Street, reshuffle and grow less quickly than the Big Four active ETF issuers: Dimensional, JPMorgan, American Century, and Capital Group, Kashner’s research reveals.
The difference between an issuer’s market share (the per cent of US ETF AUM held on December 31, 2024) and its flows share (the per cent of 2025 YTD flows it attracted), shows which firms are gaining strength and which are falling behind.
“Plain vanilla seekers swarmed into Vanguard’s products while cooling on Blackrock and spurning State Street. The revolutionaries favoured the Big Four active ETF managers. They also pivoted away from industry-specific funds like VanEck Gold Miners ETF (GDX) and towards single-stock covered call products such as Toroso’s YieldMax MSTR Option Income Strategy ETF (MSTY).”
Kashner also reveals that the changing of the guard was also on display among fixed income ETFs.
“So far this year, the Big Three along with Invesco and First Trust are losing ground to, well, pretty much every fixed income ETF issuer. Broad-based, USD investment grade bond ETFs like Vanguard Total Bond Market ETF (BND) and iShares Core U.S. Aggregate Bond ETF (AGG), which together dominate the asset class, drew just USD17 billion in H1 flows or a mere 6.2 per cent of starting AUM vs. 10.3 per cent for all bond ETFs. Meanwhile, JPMorgan and its active peers found success selling unconstrained bond funds and cash-like products.”
Kashner has this warning for issuers: “Incumbent ETF asset managers, ignore these trends at your peril. Recent activity has been splitting the US ETF market into best-in-class cheap beta, active, and highly specialised products.
“The industry shake-up among equity ETF providers is clearer when we dive deeper into the classification hierarchy. FactSet splits equity funds into three categories: size and style, sector, and high dividend yield.
“Size and style traditionally forms the core of many investors’ strategic allocations, dividing stocks according to market capitalisation or growth/value factors. This category also includes total market ETFs. The eight equity ETFs in the top 10 table are all size and style ETFs.
“Sector lends itself to tactical use, as it splits stocks by business activity. High dividend yield singles out stocks with unusually high payouts. In both Size and Style and Sector ETFs, the tussle among the Big Three and the rise of the Big Four is magnified.
“In Size and Style ETFs, 19.8 per cent of flows, or USD60 billion, went to Vanguard’s VOO. Blackrock’s iShares Core S&P 500 ETF (IVV) fell far short, netting just USD6.6 billion. State Street’s two S&P 500 ETFs (SPY and SPLG) jointly lost USD5.9 billion via outflows.
“But even outside of the fishbowl that is S&P 500 ETFs, Vanguard ran the tables, attracting USD73.3 billion to the remainder of its Size and Style ETFs. Blackrock brought in just USD23.0 billion, and State Street attracted just USD5.5 billion, led by its Portfolio suite.
“Cost matters supremely in the vanilla ETF market. Vanguard’s expense ratio of 4.5 basis points is by far the lowest vs. Blackrock’s 15.6, State Street’s 11.0, and Charles Schwab’s 7.0. It’s easy to see why Vanguard has increased its market share, even in this environment.
“The ETF market sentiment shifts come sharply into focus when looking at the Sector equity ETFs. Like the Size and Style chart above, the Sector chart uses a gap threshold of 3 per cent. As throughout this analysis, geared ETFs are tracked separately.”
If the first half of 2025 is any indication, the days of the broad-based sector or industry ETF such as State Street’s Sector SPDRs or VanEck Semiconductor ETF (SMH) are waning, overtaken by single-stock option-writing strategies dominated by Toroso Investments, Kashner writes.
“Blackrock’s Sector success rests on just two thematic ETFs: iShares U.S. Thematic Rotation Active ETF (THRO) and iShares A.I. Innovation and Tech Active ETF (BAI), which it added to its model portfolios during the first half of 2025. While thematics remained strongest on a dollar basis, single-stock strategies exhibited the fastest growth.”
ETFs, which gained fame as maximum diversification vehicles, are now home to a growing set of concentrated exposures, Kashner warns.
“Investors are seeking active management, and they do not seem to care much about an ETF’s price tag, at least for active equities. iShares Bitcoin Trust ETF was the fourth-most popular ETF in the whole country. Sector equities are tilting hard to single-stock exposure, anti-diversifying the ETF landscape. Jack Bogle would surely have had some choice words about that situation.
“Nevertheless, the house that Bogle built stands proud, supported by low-cost vanilla partisans. But the neighbourhood is changing, and the new crowd seems wild for high-priced, risky products,” Kashner writes.
“Investors can still access institutional grade, broad-based, cap-weighted portfolio building blocks, and they can still choose among many quality ETF providers. The core ETF promise is still there. Yet the new breed of ETF investor wants something completely different.
“These days, the ETF crowd includes active management junkies, money market fund refugees, and options traders. There’s never been a better time to hold a cheap, broad, core portfolio, and there’s also never been more opportunity to speculate.
“Humans are fascinating, aren’t we?”
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