It has been about three years since we last wrote about active and passive investing, and the debate itself has not changed all that much. Passive investors still point to lower fees and stronger long-term results. Active investors still point to risk management and doing something different than the market. But there have been some shifts in some of the underlying elements of the debate.
Passive strategies have become more concentrated; active ETFs are being launched at a record pace. Advisors still lean heavily toward active management in Canada, but there has been a subtle shift.
At the same time, portfolio fees have started to move lower as CRM3 gets closer to becoming visible to clients. None of these shifts mean the old debate has chosen a side, but it is important to stay up to date on the inner workings of portfolio preferences.
How We Think About It
Our thinking has not changed all that much. Active and passive are both tools for building portfolios. Choosing between them should come after deciding what exposure the portfolio needs and what role the holding is expected to play. Often, we pair them together to get cheap beta exposure but with a bit of active flair to set the portfolio apart from peers and capture some risk management along the way.
Passive can make sense when the market is broad and efficient. It can provide cheap beta exposure for a portfolio in almost any area of the market. Active can make more sense when the market is less efficient or when the index itself has risks that are worth managing.
Safe to say this is not a hard-and-fast rule. Take our emerging market exposure, for example. This is not an area that is broad and efficient, but we get our exposure through passive indices. There are other factors at play when making the management style decision, like cost, sector exposure, and geographic exposure. The exposure you want in the portfolio should trump any sort of active v. passive debate, and it certainly does for us.
The important point is that passive does not mean neutral. An index is still a portfolio built using a set of rules. In a market cap-weighted index, the companies that become the largest receive the biggest weights. That can work extremely well while leadership remains strong, as we have seen. But it can also quietly change the risk profile of the portfolio over time. We have been watching a rise in concentration in passive indices, and it is not only a U.S. story. The combined weight of the three largest sectors across regions has increased over the last 10 years. Canada has changed the least on this chart overall, and the three most dominant sectors seen 10 years ago remain the same today. But amidst them, we have seen a 6% increase in Financials. The increase has been meaningful in Europe and Japan. Even emerging markets have followed the same path, and it is even more glaring when you look at some of the underlying countries in EM.
This does not mean passive = bad. It does mean investors need to be more aware of what they are buying. A broad regional ETF may look diversified because it owns hundreds of companies, but the return experience is even more so driven by a smaller number of sectors. We are watching this one closely and considering more diversified options when we can, like our equal-weight S&P 500 stance that we have had for quite some time. The U.S. equal-weighted index’s top 3 sectors make up 46% of the investment as compared to 60% in market-cap.
How Advisors Are Thinking About It
The average advisor portfolio in our program today sits at roughly 70% active exposure. That suggests advisors still prefer managers who can make security decisions and manage risk away from the index. However, that weight does represent a shift from the end of last year.
Since November 2025, the average passive share has shifted from roughly 23% up to 30%. Not shockingly, over that same period, we have seen the effective portfolio MER drop by about 6 basis points to 0.63%. It is a short history, so we are not declaring a major trend from a few months of data, but a few things are going on during this period that could explain the movement.
Performance can explain part of it. Strong index returns have made passive solutions look very attractive. We do not see very many portfolios without a passive S&P 500 solution, and that performance has certainly contributed to the weight in portfolios. Outside of that, CRM3 could also be playing a role. With the new cost reporting becoming visible to clients early next year, advisors have more reason to review whether each higher-fee holding is earning its place. We do not think this will be an event, but more of a process where we might see a gradual reduction in portfolio fees. Even some asset management firms are starting to reduce fees to entice the continued use of active strategies.
The debate for advisors remains the same: pay active fees where the strategy is truly different or has a real opportunity to provide value. Use passive where inexpensive market exposure is all the portfolio needs.
Not Just a Label
There was a time when the labels were fairly simple. ETFs were passive, mutual funds were active. That distinction is not as clear-cut as it used to be. An ETF can now be highly active, and a mutual fund can sit very close to its benchmark (likely a passive index). The wrapper can tell you how the investment is packaged, and that’s about it now, it does not tell you how it is managed.
The number of active ETF listings in the U.S. has surged over the past five years. Canada has been further along this road for quite some time. Active ETFs are not a new development for us, but the Canadian market has approached an interesting inflection point. The number of active and passive ETF listings is crossing over.
Canada may have had a head start, but the recent growth in the U.S. has been much more dramatic. Managers recognize the benefits of the structure. The launch data is impressive, but listings are supply. Assets and flows are demand. Both north and south of the border, the story looks pretty similar. Passive ETFs still control 87% of U.S. ETF assets. In Canada, that share is lower at 80% but still very much in control. A 20% share for active ETFs in Canada after many years shows how difficult it is to shift into an existing asset base. Those products can be built pretty quickly, but the movement of investor capital takes a lot longer.
The flows tell much of the same story. The dollars are still meaningful – note billions in Canada vs. trillions in the U.S. – but passive remains well ahead across the periods shown. Active ETFs are not failing by any means; most are still very young and do not have the track records to gather extensive assets that passive does. Others are simply ETF listings of prior active mutual funds, which could garner more switches along the way.
Passive does still dominate the ETF market from the demand side, but the industry is continuing to increase the supply side for active. Over time, cost pressures should continue, and the gap between active and passive fees may narrow. As that convergence plays out, we may begin to see active capture a greater share of ETF flow. For now, the surplus of active ETFs remains, but it will be a fun one to watch.
Final Thoughts
Active and passive both have a place in a portfolio. The key is using each where you believe it adds the most value and making sure every holding has a clear role in the portfolio.
— Brett Gustafson is an Associate Portfolio Manager at Purpose Investments
Sources: Charts are sourced to Bloomberg L.P, as at June 30, 2026.
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