First-quarter active ETF performance suggests 2026 may be a year of rotation rather than momentum. Investors did not indiscriminately reward active risk-taking, but instead favoured exposure to regions and sectors where valuations were more reasonable, the policy backdrop was improving and market participation became broader. Europe, Japan and emerging markets all fitted that description better than the more crowded corners of US thematic growth. Fixed income, meanwhile, rewarded prudence rather than conviction for its own sake.
Performance across the universe suggests the most important distinction was where managers were taking risk. Funds with exposure to Europe, Japan and emerging markets generally fared better than those tied closely to US growth, particularly the more crowded innovation and technology themes. As such, Q1 was a quarter in which market leadership widened out, rewarding diversification and regional breadth rather than simply doubling down on the winners of the past two years. The biggest beneficiaries included Avantis Global Small Cap Value (+9.5%) and Fidelity Japan Equity Research Enhanced (7.0%), while the likes of JP Morgan US Growth Active (-7.8%) fared poorly.
Such performance suggests the market is becoming less willing to pay up indefinitely for long-duration growth stories. Where active managers were exposed to banks, industrials, healthcare and domestically supported recovery themes, returns were more resilient. Where they remained concentrated in disruptive growth, artificial intelligence and other richly valued parts of the US market, performance came under greater pressure. Exposure was most rewarded where valuations were less stretched and earnings leadership broadened out.
In emerging markets, a softer dollar and improving global financial conditions have made it easier for investors to look again at markets that, recently, have often sat in the shadow of US growth. In practical terms, that has tended to favour active strategies because emerging market returns are rarely uniform. A quarter in which investors were more open to regional differentiation therefore benefitted the likes of Fidelity Enhanced Emerging Markets (+7.1%) and Avantis Emerging Markets (+6.5%).
By contrast, the first quarter was less forgiving for the thematic end of the active ETF market. Many were exposed to the same crowded trade: expensive, long-duration growth companies whose valuations rely heavily on sustained optimism. That left them vulnerable as enthusiasm around AI and disruption became harder to translate into ever-rising share prices – see the 8.2% fall in ARK Artificial Intelligence & Robotics. Clearly this trend was exacerbated by the Iran war, which also had some noticeable direct impacts on the sector – most obviously the 7.1% fall of the US Global Investors Travel ETF. In contrast, a standout winner was Horizon Kinetics Full-Cycle Inflation Equity (+18.1%), largely due to energy holdings that benefitted from the hostilities.
Within fixed income, active bond ETFs generally did better when managers prioritised steady income and protecting investors’ capital, while strategies relying on a broad rise in longer-term bond prices found conditions more difficult.
