Active ETFs are quickly moving from the margins to the mainstream as advisors look for more flexible, tax-efficient tools to navigate an increasingly complex market backdrop. With volatility persisting, sector dispersion widening, and client expectations evolving, many wealth managers are rethinking how active management can be delivered inside modern portfolios.  

Michael Baron, Co-President and Portfolio Manager at Baron Capital, shares his perspective on why active ETFs are gaining traction now, how advisors should think about incorporating them in 2026, and which sectors and asset classes are topping investors’ wish lists for the year ahead. 

CM: What has changed over the past few years that makes this moment particularly compelling for active ETFs, both from an advisor and investor standpoint? 

MB: The industry is evolving and growing, and we are expanding with it. Investors want ETFs because of their perceived benefits: ease of use, intraday liquidity, holdings transparency, operational savings, and tax efficiency. And ETFs had another record year in 2025 as advisors are increasingly using them to construct portfolios and meet client needs. Investors poured in nearly $1.5 trillion into the ETF market, and total ETF assets are now above $13 trillion. They now make up about 38% of the overall market.¹  

What makes this moment most compelling though is that investors are increasingly turning to active ETFs for professional management in addition to the structural advantages ETFs offer. Out of the nearly $1.5 trillion that entered the ETF market in 2025, more than $450 billion went into active ETFs.¹ Like passive ETFs, active ETFs are transparent, providing investors visibility into holdings throughout the day, tax efficiency, and flexibility, but with the added benefit of professional management. In 2025 alone, 73% of active ETFs outperformed their respective benchmarks.² 

Advisors and investors are also looking for more from ETFs: solutions that support long-term goals. For us, the moment is compelling for an even simpler reason: our clients were demanding it. Investors didn’t just want any ETF—they wanted Baron Capital’s proven fundamental investment approach in an ETF wrapper.  

CM: How do you explain the key differences between an active ETF and a traditional active mutual fund to advisors who may still see them as interchangeable? 

MB: The mutual fund remains a highly effective structure. Shareholders transact at net asset value, it provides seamless access to private securities, and it allows dividend reinvestment programs, among other benefits. For nontaxable accounts, like individual retirement accounts (IRAs) and employee sponsored 401(k) plans, mutual funds are a great fit.  

Furthermore, certain Baron Funds participate with third parties in a redemption in kind (RIK) program. This program allows us the opportunity to rebalance a mutual fund portfolio or meet redemptions without having to sell securities and realize those gains ultimately assisting with the tax efficiency of the mutual fund and minimization of transaction costs. For over 40 years, Baron Capital has built success in this vehicle, and our Funds have strong track records that speak for themselves.  

ETFs generally offer different advantages—flexibility, transparency, and tax efficiency—which can make them a better solution than mutual funds in certain situations. The growing ETF landscape is giving investors more options to invest in ways that work best for them. 

If we can deliver an investment strategy in a vehicle that is more suitable for a client, we will do it because our goal is to meet client needs. Over 80% of new ETF launches in 2025 were active and 37% of ETF flows in 2026 went into active strategies, signaling the growing demand for this investment vehicle.⁴ 

I don’t see mutual funds and ETFs as interchangeable, but rather as complementary options that allow investors to gain access to portfolios and outcomes in the way that best suits their goals and needs.  

For Baron Capital, active ETFs are another way to deliver our long-standing investment philosophy. Our approach is unchanged: we continue to focus on identifying differentiated growth businesses with durable competitive advantages and exceptional management teams. That discipline translates across investment vehicles, whether mutual funds or ETFs.   

The same portfolio managers who have managed our mutual funds for years—in some cases decades—are leading our active ETFs. In many instances, these ETF launches are natural extensions of existing capabilities. That may mean expanding a domestic strategy into global markets or broadening a small-cap mandate into SMID-cap, which expands the opportunity set while applying the same process that has defined our results over time.  

The wrapper may change, but our philosophy does not. We want to deliver quintessential Baron Capital strategies in whatever vehicle our clients prefer.  

CM: Where are you seeing the strongest advisor demand: as a replacement for existing mutual fund exposures, a complement to passive ETFs, or as a new sleeve altogether? 

MB: The clearest answer is this is not about replacing. Mutual funds remain a very successful and appropriate structure for many clients. On the other hand, passive ETFs provide low-cost access to market indexes. At the end of 2025, passive ETFs had around $11 trillion in assets, which is about 90% market share.³ In this case, an active ETF can be an effective complement. 

For investors seeking more targeted return profiles or differentiated sources of alpha, index replication alone may not be sufficient. Active ETFs provide optionality in a variety of ways: they offer the same exposure as mutual funds while adding tax efficiency, or they can complement passive ETFs to target a more specific outcome.  

Our approach is truly active, built stock by stock, making our ETFs a strong complement to passive and low active share funds. Many ETFs in the market that are labeled “active” remain closely tethered to their benchmark. Our portfolios are constructed through bottom-up security selection and deep fundamental research. It’s a differentiated approach, and we are confident in its potential to benefit clients. 

For us, it’s about delivering the same time-tested approach that our clients have trusted for 44 years, in the structure that best fits their needs. We are building and adding, not replacing. We view our ETFs as an extension of our existing platform. Our investment lineup will not shift to any one structure. 

Some of the ETFs we launched are new strategies, and two are conversions from existing mutual funds. Based on their holdings and specific investment goals, our ETFs can serve as both core and tactical allocations, complementing existing positions like mutual funds, passive and active ETFs, and other investment structures. Our ETFs are foundational portfolio building blocks, not short-term trading vehicles. 

CM: Are there particular client segments—high-net-worth, mass affluent, or institutional—where the case for active ETFs resonates most strongly right now? 

MB: The strongest resonance is not defined by wealth tier as much as by mindset. Over the past year, I’ve had face-to-face conversations with clients ranging from sovereigns and institutions to banks, insurers, and family offices, all focused on how they can access our investment expertise. Our ideal investors think the way we do—not in months or quarters, but in decades and generations. Our philosophy applies across all client segments, but it particularly resonates with those seeking patient, transparent, and consistent approaches. Our investment philosophy is simple, understandable, and repeatable.  

We have always managed all our investments actively, using a bottom-up approach to outperform the broader market—a strategy we think is desirable for all client segments. The common thread among clients is a desire for durable, long-term strategies delivered through the structure that best fits their needs.  

CM: Based on your conversations, what are advisors telling Baron Capital they need most from active ETF strategies today? 

MB: Advisors want strategies built for investors, not for trends: solutions that align with long-term goals, not short-term impulses. There is a strong demand for ETF-based solutions that target specific goals and help diversify beyond broad market holdings. And advisors want managers they can trust to deliver on these objectives with investments they can rely on. 

ETFs are clearly popular, and firms are flooding the market with these products. There’s a wide variety of strategies available in this wrapper, and not all ETFs are created equal. Clients don’t need marketing campaigns, catchy slogans, or exotic features. They need foundational investment strategies and products with clear attributes, backed by a deep and talented team, where research is thorough and the investment philosophy is consistent. Essentially, advisors need what Baron Capital has always delivered: patience, transparency, repeatable results, and the assurance that we did not rush to be first—we want to do it right. 

CM: Beyond equities, which asset classes—such as fixed income, thematic strategies, or alternatives—are you seeing as natural fits for an active ETF structure? 

MB: Broadly speaking, equities are well-suited for active management because of factors like high dispersion and volatility, regardless of vehicle. On top of that, equities benefit most from ETF tax efficiency since they tend to see the strongest capital appreciation over time. This works well for us because growth equities have always been our focus. 

We are not trying to be all things to all people, and we are not chasing trendy categories like crypto, fixed income, or private credit. While the ETF wrapper can be applied broadly, our focus remains on delivering long-term equity expertise through this structure in a thoughtful way. What matters most is maintaining our DNA—our investment philosophy, process, and mission to change lives—while carefully considering which areas are most suitable for this ETF structure. 

This does not mean that other asset classes are not a natural fit for an active ETF. Because we view investments from a long-term perspective, we believe that the only way to outpace inflation and to meet long-term objectives is to OWN growth businesses. In our opinion, the best way to do this is by investing with an asset manager with the expertise to identify growth businesses with the durability to grow for a long period of time. 

CM: What should advisors be watching now that will shape how active ETFs are used in portfolios in the years ahead? 

MB: There are now more ETFs on the market than publicly traded companies. Since 2016, the number of active ETFs has risen dramatically. The market is up more than 1,200%, and it’s nearly doubled in the past two years.¹ Assets have grown from about $52 billion in 2016 to nearly $1.5 trillion in 2025.¹ But here’s the reality: there’s just no way advisors and investors can allocate to all these products. With this level of growth and new launches, some ETFs are going to win, gather assets, and scale. Others simply aren’t going to last.  

Advisors should watch whether the ETFs that prevail continue to evolve as true investment vehicles, beyond low-cost index strategies into thoughtful, outcome-oriented tools—or become dominated by trend-driven products. This raises an important question about what the market truly needs. We believe it needs a different kind of active ETF—one built for investors, not trends. The space is crowded, but firms like Baron Capital, who prioritize doing it right over doing it fast, can define the standard. 

ETFs are not trading vehicles to us. We view them as foundational portfolio building blocks aligned with long-term objectives. Sustainable investments aren’t meant for quick trades or chasing short-term gains. They’re built to be core, long-term allocations in investors’ portfolios, even when markets get volatile. 

1 ©2025 Morningstar as of December 31, 2025.  

2 Morningstar as of December 31, 2025, based on State Street Investment Management calculations. 

3 Monthly Active ETF Monitor | J.P. Morgan Asset Management.  

4 ETFdb.com, “Active ETFs Reached Growth Mode,” September 25, 2025.