Exchange-traded funds (ETFs) are pooled investment securities that trade on a stock exchange like individual company stocks and are typically structured around factors, themes, or market exposures. While they have some similarities to mutual funds, there are significant differences:

• Lower cost: ETFs, particularly passive ETFs, are offered at significantly lower expense ratios.
• More liquid: ETFs trade throughout the day; for mutual funds, buy/sell activity, as well as visibility into pricing, only occurs after market close.
• More tax efficient: The in-kind creation/redemption process for ETFs can reduce the number of taxable capital gains distributions.
• More transparent: ETF holdings are disclosed daily while mutual fund holdings are typically disclosed quarterly.

Evolution of the ETF Universe

The first ETF, the SPDR S&P 500 ETF (SPY), was launched in 1993 and passively tracked that index. Offerings increased and became more diversified in the 2000s, as ETFs were created with more specific geographic exposures and geared toward other asset classes like fixed income and commodities. Carveouts of broader market exposures (such as style-specific S&P 500 ETFs) as well as factor-oriented and active ETFs were also born during this period.

While the 1990s and 2000s were notable for the initial expansion of the ETF universe, calendar year 2020 to present day are notable for the increased scaling and commercialization of the ETF space, especially for active ETFs. This began in 2019 with the SEC 2019 ETF Rule (also known as Rule 6C-11); the rule streamlined the process for the launch of new ETFs, eliminating the need for each ETF to obtain individual exemptive orders from the SEC. This rule also allowed for proxy portfolios to be used for daily disclosures (i.e., regulatory reporting requirements), affording managers the ability to protect some of their “secret sauce” around the implementation of their portfolios. With ease on the regulatory front, this led to growth dynamics (especially following the 2020 COVID market period) that persist today:

• The acceleration of active ETF adoption: In 2009, there were just 35 active ETFs, according to ETFGI, a research and consulting firm. In 2019 (around the rollout of Rule 6C-11) there were 817. As of July 2026, there are over 5,500 active ETFs in the marketplace, representing over $2.5 trillion in assets.
• The continued diversification of offerings by asset class, theme, and market strategy: What started out as a universe of primarily active large cap and bond ETFs has expanded to cryptocurrency, alternative, thematic, and options-based ETFs.
• Sizable ETF inflows have outpaced mutual fund flows. In July 2026 alone, active ETFs saw $90 billion in inflows, and on a YTD basis, saw $590 billion in inflows; this far exceeds the $320 billion and $188 billion in inflows during the same periods in 2025 and 2024, respectively. ETF flows also continue to outpace mutual fund flows. Since 2022, we’ve seen net negative flows for mutual funds and the converse for ETFs. Moreover, the percent of market share for both vehicles has significantly converged. In 2016, it was an 80/20 market share split between mutual funds and ETFs, respectively; today, mutual funds occupy 60% of market share while ETFs represent the remaining 40%. (Data from both ETFGI and the J.P. Morgan Guide to ETFs)
• Mutual fund conversions into ETFs have grown. In 2021, only 15 mutual funds were converted to ETFs, according to J.P. Morgan; fast-forward to 2025, we saw 60 mutual fund-to-ETF conversions and are at 25 conversions YTD. Translated to assets, the 60 conversions in 2025 represented $235 billion in total assets (and $40 billion in net inflows) while YTD conversions represent nearly $300 billion in conversions (and $27 billion in net inflows).
• Growing institutional uptake: According to a 2025/26 study by Cerulli Associates of 31 institutions with $1 billion+ of AUM (which included public/corporate defined benefit (DB) plans, endowments and foundations, insurance, and health system clients), ETF implementation has nearly doubled over the past five years, reaching over $330 billion in 2025. Five-year compound annual grow rates around ETF assets were led by foundations at 33%, endowments at 38%, and U.S. public DB plans at 24%. While tax efficiency has long been cited as a key driver of ETF usage for investors (specifically retail clients), use cases for institutions have centered on fee optionality, liquidity, and access to market exposures. Uptake of ETFs within defined contribution plans, however, has been limited as CITs continue to take share.

Why the Evolution Is Important for Active Managers

It is not unusual to hear from active managers about the difficulties of navigating a market structure that has become increasingly concentrated. The changing and growing landscape of the ETF universe has arguably contributed to that concentration, and by proxy, added difficulty to the ability to unlock fundamentally-based alpha. For instance:

• Price discovery is potentially less fundamentally driven. ETF proliferation has created more avenues for investors to express targeted exposures, increasing flow-driven trading activity in individual securities. As a result, short-term price discovery may be increasingly influenced by flows, positioning, and rebalancing rather than changes in company fundamentals, making it more difficult to distinguish fundamental signals from flow-driven noise.
• Within ETF structures, stocks can become correlated. As stocks are held across different ETF baskets and attract higher volumes of ETF flows, they become more correlated as their return patterns converge—even if their underlying fundamentals do not overlap. This increases the concentration of risk around these baskets of stocks (and the themes, sectors, and factors that they are associated with), challenging the benefits of diversification that many active managers look to achieve through portfolio construction. Moreover, heightened concentration can challenge the alpha potential that can be achieved through differentiated stock selection—the goal of many fundamental active managers.

This challenge can be illustrated by what has happened this year with technology-related ETFs. Technology ETF flows ballooned from $5 billion (which occurred between January and March) to $16 billion from April to May alone. Thematic ETF flows were $430 billion in the first half of 2026. The crosscurrent of the technology and thematic ETFs was AI infrastructure stocks, particularly memory stocks. Memory stocks—like Sandisk and Micron—were each up over 200% in 2Q26 alone, impacting many large cap growth managers that had underweights or zero weights to the space. The latter was not an unusual position for managers to have. These stocks were in the Russell 1000 Value benchmark prior to the Russell reconstitution, so owning them at size would have increased out-of-benchmark ownership, and subsequently, tracking error. These stocks are typically viewed as a value cyclical and perhaps less aligned with a typical growth stock.

In short, market concentration has become that much more nuanced as investors flock to more ETFs and an important consideration when assessing process execution and risk management.