There was a time when ETFs were considered as financial hitchhikers—clever riders clinging to the larger vehicle of index funds, rarely acknowledged as drivers themselves. However, the most recent data clearly shows that the passenger has assumed control.
With $13.5 trillion already tied up in exchange-traded funds and $1.49 trillion in net inflows during 2025 alone, ETFs have not only grown incredibly fast, they’ve achieved a level of importance that small-cap benchmarks no longer compete. Their effect has grown significantly for a group that was previously marketed as purely passive.
Key Market Context – ETFs vs. Small Cap Indexes
| Metric | Value / Insight | Source / Context |
|---|---|---|
| Total ETF Assets (2025) | $13.5 trillion | Surpassing many traditional equity segments |
| Net ETF Flows (2025) | $1.49 trillion | Driven by demand for liquidity and transparency |
| Active ETFs Market Share (End of 2024) | 8% of ETF market | Marked increase in launches in 2025 |
| Small & Mid-Cap ETF Assets | ~$837 billion | 82% passively managed |
| Notable Shift | ETFs now dominate price discovery for some indexes | Mirrors prior futures dominance |
ETFs have been described—at times admiringly, other times warily—as “price discovery parasites.” This appeared to be a dramatic exaggeration at first. But over time, with their high liquidity and real-time pricing, ETFs began inching into territory formerly occupied by futures. Now, in certain portions, they’ve overtaken them. ETFs can now set the tone instead of just following it, especially in small caps where liquidity is limited and momentum frequently drives pricing.
The current market analysis charting intraday fluctuations and applying weighted price contribution methodologies identified a crucial turning point. ETFs are causing market movements rather than just reflecting them. When it comes to key small-cap indexes, the price signals are increasingly coming from ETFs first.
This change is particularly visible in the SMID (Small and Mid-Cap) industry. Despite making up only roughly $837 billion in ETF assets, more than 80% of them are passively managed. Passive exposure, paradoxically, now dominates an area that used to be the last stronghold of active discovery. Yet even as flows retreat from small-cap ETFs, the remaining capital continues to exert disproportionate influence—especially when retail transactions combine into momentum movements.
It’s interesting to see that active ETFs have begun to erode that passivity. By the end of 2024, active ETFs will account for 8% of all ETF assets. They are not only prospering, but they are also starting to redefine what an ETF is. Newer entrants utilize AI screening, macro filters, and thematic approaches to dive into parts of the market traditional funds might miss. Their growth is particularly inventive, combining the advantages of ETF liquidity with discretionary flexibility.
Even so, the market’s current is still being redirected by the passive block despite the noise produced by active ETFs. As more investors transfer capital into thematic and indexing strategies, the price behavior of underlying small-cap stocks begins to match the activity of their ETF containers. Some of those stocks no longer trade on their own story—they move as a basket, tied by algorithm and arbitrage.
Last autumn, I witnessed this firsthand when a small-cap biotech company jumped at midday, only to discover that the ETF it belongs to—rather than the stock itself—had just been referenced in a CNBC piece.
That shift, while subtle at first, bears consequences that are impossible to ignore. Small-cap stocks are now referred to by analysts as “ETF derivatives,” a term that would have sounded ridiculous ten years ago. But it’s no longer purely figurative. The method is straightforward: when ETF inflows hit, designated market makers rebalance, and trading desks execute batches of small-cap deals with near-simultaneous timing. Even when the underlying fundamentals stay the same, that surge in purchasing or selling might cause prices to fluctuate.
What emerges is a feedback loop. ETF flows are monitored by investors in addition to earnings releases. Managers hedge against index behavior, not corporate advice. Additionally, liquidity, which was previously irregular in small caps, now floods in spurts rather than trickling continuously.
Yet for all the growing power of ETFs, small-cap active managers haven’t been banished. The exact opposite. Some see this as an opening. Since most small-cap ETFs are still passive, possibilities for alpha persist, buried in the gaps between index flows and real business value. Selective managers have a window—however narrow—to exploit temporary mispricings induced by mechanical trading.
By harnessing those inefficiencies, some active funds are quietly excelling, reminding us that price discovery is never totally automated. It merely demands finer timing and more patience than previously.
There’s also a regulatory undercurrent emerging. With ETFs already holding more capital than many traditional benchmarks, the border between derivative and asset is becoming blurred. Market watchers are questioning whether ETFs should be examined more closely because they are fundamental, not because they are defective.
ETFs are, after all, supposed to be transparent and rule-based. However, because of their cumulative effect, even minor rule modifications, such as reweighting techniques or inclusion criteria, can have a simultaneous impact on dozens of stocks. It’s a butterfly effect disguised in terms of compliance.
For younger investors, who’ve come of age with ETFs as the default investing instrument, the domination may seem inevitable. But for anyone who recalls when fund managers ruled dominant, this transformation feels surprisingly fast—and strangely silent. A vote was not held. No sudden explosion. Just a steady, extremely efficient restructuring of market dynamics.
The message isn’t to fear ETFs, but to recognize them as active players—whether they call themselves passive or not. Although simplicity is emphasized in their design, their scale today demands complexity.
And the lesson is obvious, particularly for small-cap investors. It’s no longer enough to pick the appropriate stocks—you must also grasp which ETFs they live inside. Because increasingly, those containers move first. And the contents follow.
