Bespoke ETFs and Flex Options Redefine Portfolio Strategies in 2025

The global investment landscape in 2025 is in the midst of a significant transformation as bespoke exchange-traded funds (ETFs) and flexible derivatives colloquially referred to as flex options, which were once viewed as strictly specialist instruments, evolve into universal portfolio construction tools. They are no longer considered niche solutions available to expert investors and institutions with specific needs. They are required for the volatile world we inhabit today, characterized by rising interest rates, increasing demands for liquidity, and rising environmental, social, and governance (ESG) concerns. They are taking on this importance and the habits that will eventually mold our behaviour in terms of diversification, risk management, and income generation.

Active ETFs are leading the charge in this revolution, offering investors the best of both worlds - transparency and agility during times of uncertainty. Evidence from 2024 shows how wildly popular these strategies are, given that over the last twelve months, more than three-quarters of all ETFs launched were actively managed strategies, as opposed to the traditional ETF linear passive benchmarks. This behaviour may just be a reflection of the breadth and depth of their respective sales, as these instruments are coveted for their ability to adapt to shifts in the market while not sacrificing the fees or structural components of the ETF wrapper. In fact, this behaviour has been most pronounced in fixed income markets, where active bond ETFs saw their sales triple in 2024. With rising rates, these products may now be consumed for their ability to simultaneously and dynamically rebalance their holdings while achieving diversification and adding an absolute return feature or taking away risk at the expected price.

An example of this progression in the market is the emergence of income tools in ETF structures. One now well-utilized model is an equity premium income ETF, where equity beta is used with option strategies to create regular income while limiting downside risk in the underlying equity. This replicating has caught on in the marketplace, as this model provides an attractive proposition to investors in an environment of low interest where yield has not been widely available. The popularity of this repackaging of income structures reflects the ways in which investors are now looking for tools that represent growth opportunities that provide systematic income, as well as durability to also toward lots of market activity.

In addition to ETFs, custom derivatives are also playing an important role in modern portfolio construction. More and more investors are opting for customizable strategies which enable them to adequately meet their objectives - be they financial, ethically-based, or otherwise. For instance, a donor-funded organisation managing billions recently moved half of its portfolio into a custom beta completion strategy that excluded companies not meeting certain ESG criteria. The result was a portfolio that not only aligned with the values of the donor-funded organisation but also enhanced their risk profile. Recently, a large university endowment constructed a cash equitisation strategy by using global equity futures to invest its cash without moving to equities. By following this method, the endowment achieved tens of millions in upside with their longest running overlay strategy, demonstrating how derivatives can rapidly create productive assets from cash that was unused, without forfeiting flexibility in cash management.

The global rise of these strategies has also been aided by positive regulatory changes. As an example, in North America, expected approvals for ETF share class exemptions may allow mutual funds to use ETF-like structures, giving investors the opportunity for better liquidity and tax efficiency. This has the potential to gradually reduce barriers to the difference between mutual funds and ETFs, making access to active strategies easier to a wider audience. In the Asia-Pacific region, options-based ETFs have grown faster than expected with $170 billion already in assets under management and hundreds of products under development over two years. Europe has also increased accessibility to active ETFs with tax exemptions for active ETFs within jurisdictions like Luxembourg, while Germany and France show evidence of increasing ETF savings plans, which provide access to retail investors.

Another factor in the rise of ETFs has been the increasing recognition of digital assets in the ETF space. While historically, the discussion around digital assets has centered on Bitcoin and Ethereum, ETFs are now being developed to include a greater diversity of digital tokens. This will allow investors a regulated and accessible manner to invest in the ongoing growth and innovation of the digital asset space. In addition to offering exposure to new digital assets, the increased number of digital asset based ETFs also suggests a widening in the appetite for investor innovation within the ETF space, visually cementing the ETF framework as a vehicle for both mainstream investment strategies and alternative investment strategies alike.

For investors, institutional and retail alike, the practxical applicability of these advances are becoming more and more apparent. For instance, many investors are now viewing active ETFs as core holdings for their diversified portfolios since investors value the flexibility and efficiency active ETFs deliver. Buffer ETFs, and even equity premium funds, provide a way to meet income needs and protect against downside. Flex options and other custom strategies provide a way to hedge against volatility while maintaining exposure to upside. Staying on top of changing regulations has also become essential as regulatory guidance around ETFs and digital assets presents more opportunities for investors to access innovative financial products.

The emergence of bespoke ETFs and customised derivatives represents more than a momentary shift; it marks a structural change in portfolio construction that aligns with the nature of a financial world characterised by uncertainty and complexity. Investors are choosing to move away from broad-based, all-purpose passive strategies; they are looking for instruments that provide precision, flexibility, and alignment to their individual goals and values.

This also translates into a recognition that great portfolios of 2025 need to be built not just to capture market returns, but to withstand shocks, recalibrate for changes in interest rate cycles, and allow for ESG objectives. The ones who will ultimately thrive, are those who understand that the ability to incorporate bespoke ETFs and flex options is not an elective value add; it is a core characteristic of portfolio management today.

The future of investment will be defined by ever-increasing customisation and innovative strategies. As exchange traded funds (ETFs) and derivatives are becoming more flexible and tailored, new opportunities for risk adjusted returns, income generation, and sustainability integration are being pursued. In a rapidly evolving market, the decision for investors is simple: either adapt and immerse in utilising these new tools, or risk being excluded and lost in a financial landscape that is quickly changing toward customised solutions.