The revival of Momentum ETFs in 2025 has drawn significant interest from both investors and institutions, as these funds have surpassed general market indices and attracted unprecedented capital inflows. This momentum is fueled by a mix of evolving investor attitudes and fundamental changes in the passive investment landscape, influenced by institutional participation, regulatory advancements, and the expansion of active ETFs. Here’s a closer look at the driving factors behind this movement and its implications for future portfolio strategies.
Market Sentiment: Shifting from Tech Mania to Strategic Rebalancing
Investor sentiment has shifted dramatically in 2025, especially within technology and AI industries. Although high-profile momentum stocks such as Tesla and Broadcom have experienced a decline in returns, the overall popularity of momentum investing remains strong. For example,
the iShares MSCI USA Momentum Factor ETF (MTUM) has delivered better results than the S&P 500
, achieving a 15.5% return year-to-date as of July 2025. This performance signals a sustained interest in strategies that leverage price movements, even as investors adjust their outlook on AI-related growth.
The correction in overvalued technology shares has also led to a renewed focus on value stocks, yet momentum ETFs have responded by adopting advanced risk management approaches.
Academic studies highlight this flexibility
, demonstrating that techniques like volatility adjustment and factor rotation can help reduce losses during market downturns. Consequently, momentum investing is increasingly regarded as a practical approach for navigating complex markets, rather than just a speculative tactic.
Structural Changes: Growth of Active ETFs and Enhanced Efficiency
The evolution of passive investing has been transformative. By the middle of 2025,
active ETFs represented 396 new launches
in just the first six months—almost seven times more than new active mutual funds and six times more than new passive ETFs. This trend is propelled by the operational benefits of ETFs, such as immediate liquidity, tax advantages, and reduced costs compared to traditional active funds.
Institutional players are at the forefront of this shift.
By the third quarter of 2025, they had invested $377 billion in Momentum ETFs
, which is twice the average quarterly inflow seen from 2020 to 2024. This growth is part of a broader “core and explore” approach,
where passive ETFs form the foundation of portfolios
while active ETFs are used to pursue new opportunities in areas like AI and thematic investing. The main attraction: ETFs allow for rapid portfolio adjustments in turbulent markets, a crucial benefit in today’s era of global fragmentation and political uncertainty
as noted by market experts
.
Historical Context: Regulatory Progress and Thematic Strategies
The current surge in active ETFs echoes the expansion of ETFs in the 2000s, when the market broadened from equities to include bonds, commodities, and factor-based products
as documented in research
. A major turning point was the SEC’s 2019 Rule 6c-11 (the “ETF Rule”), which made it easier to launch active ETFs by lowering regulatory hurdles
according to industry reports
. This development is reminiscent of the 1990s, when index ETFs transformed passive investing.
Thematic investing has also played a significant role in the renewed popularity of momentum ETFs.
The global thematic fund sector, worth $779 billion
by the third quarter of 2025, has experienced a resurgence of interest in AI, green energy, and Big Data. For instance,
the SPDR S&P 1500 Momentum Tilt ETF (MMTM) saw its performance ranking soar
from the 3rd percentile in 2024 to the 91st in 2025, highlighting how momentum strategies are well-suited to low-interest environments and the demand for high-growth investments.
Academic Perspectives: Factor Strategies and Momentum’s Boundaries
Scholarly research offers a deeper understanding of the momentum comeback.
Analyses covering 150 years and 46 nations validate
the strength of momentum as an investment factor, though it tends to lag during market corrections. Smart beta ETFs, which combine passive and active elements, have become a cost-efficient substitute for traditional active funds. These products provide factor exposures like momentum at lower costs, and their risk-adjusted returns often surpass those of “closet factor” mutual funds
as studies suggest
.
Still, momentum’s success is not assured. As ETFs become more accessible and streamlined,
the classic momentum edge has diminished
in certain markets. This highlights the importance of adaptive risk controls and diversification—recent setbacks in high-priced tech stocks in 2025 demonstrate the dangers of overly concentrated bets
as market reviews point out
.
Looking Forward: Weighing Opportunities Against Risks
The renewed strength of Momentum ETFs reflects the dynamic relationship between investor attitudes and structural change. While institutional investments and thematic trends have driven expansion, caution remains essential.
The less obvious costs of passive strategies
emphasize the need to consider implementation challenges. Additionally, the widespread adoption of ETFs means that market trends can reverse swiftly, as seen in the 2025 downturn in AI-related stocks.
At present, the narrative of momentum ETFs is one of adaptability and transformation.
With global assets under management (AUM) projected to reach $147 trillion
by mid-2025, ETFs are set to play an even larger role in both passive and active investment strategies. The challenge for investors is to harness the potential of momentum while maintaining robust risk controls—a principle that has stood the test of time in financial markets.
