Nearly every active exchange-traded fund on the market today shares a common origin story: they were born after the Securities and Exchange Commission's 2019 ETF rule, which leveled the playing field for active managers. Brandon Clark, director of ETF business at Federated Hermes, notes that unlike mutual funds—which carry a century of performance history—active ETFs have no entrenched leaderboard. "We all started from scratch around 2020," he said, adding that there is no predetermined position for any firm in that ranking.
That open field is what drew Clark to Federated Hermes nearly six years ago. He sees the roughly $12 trillion still parked in actively managed mutual funds (as of June 30, 2026, per the Investment Company Institute) as available territory for the ETF wrapper. But advisors are becoming more specific about what they want that wrapper to do, and the race to define active ETFs is far from settled.
Income strategies get more targeted
Income generation is one area where precision matters. With rate uncertainty persisting, many advisors are focusing on the front end of the yield curve, where Clark sees an attractive trade-off between yield and duration risk. "Clients are trying to manage duration, not knowing the path of travel for rates," he said. "Can I lock in those yields without going all the way out and introducing that volatility again?"
Extending duration no longer necessarily buys substantially more income, Clark argues. Much of the available yield can be captured at the short end, allowing advisors to limit interest-rate sensitivity. Federated Hermes has built strategies around this idea, including the Federated Hermes Ultrashort Bond ETF (FUSD), which targets duration of one year or less, and the Short Duration High Yield ETF (FHYS), which seeks competitive yield with lower duration than the broader high-yield market.
Covered-call strategies have also gained traction since 2022, as advisors rethink how clients can generate cash flow without giving up equity exposure. "The question becomes, what's my equity risk mix look like?" Clark said. "I might be able to actually keep some equity risk on the table using some of these covered-call strategies." This broadens the income decision to include short-duration bonds, longer-duration credit, and options-enhanced equities, each with a different risk profile.
Concentration risk drives portfolio changes
Concentration in a handful of mega-cap names is no longer just a talking point; it is showing up in portfolio construction. "Advisors worry when five to ten stocks are driving outcomes," Clark said, "so they're thinking about how to best manage that risk." While market-cap-weighted indexes have always allowed successful companies to grow into large positions, the degree to which advisors are questioning that concentration is new.
Some advisors are responding by tilting toward dividend-paying, lower-volatility names and increasing allocations to companies with durable fundamentals. Federated Hermes' equity income lineup reflects this tilt: the Federated Hermes US Dividend ETF (FDV) and the Federated Hermes Enhanced Income ETF (PAYR), which adds an option overlay, both offer defensive equity exposure without over-reliance on a few names.
The wrapper matters
Implementation can change the result as much as the exposure itself. "The wrapper makes a huge difference," Clark said. His analysis showed that active ETFs exhibited an average annual tax burden 1.26% lower than active mutual funds for the five-year period ending April 30, 2026, and 1.48% lower for the three-year period. Asset location across taxable and tax-deferred accounts can further affect returns.
Daily trading volume can also be misleading. A lightly traded ETF is not necessarily illiquid, since the underlying securities and the creation and redemption process determine how easily it can trade. As the active ETF market fills out, Clark expects advisors to become more selective, not less. "More advisors are going to look for alternative ways to get exposures other than just through index-tracking funds," he said.
The broader trend is clear: active ETF inflows are surging, and their market share is growing. But as Clark's comments suggest, the real competition is not just about assets—it's about defining what active ETFs can do for advisors and their clients.
