Effectively managing portfolios and risk may be quite challenging for investors. This is especially true when investors must contend with elevated inflation, the impact of tariffs on the global economy, and market volatility.
Enter model portfolios, or models: a ready-made mix of assets that are tailored to different investment objectives and risk profiles.
Models were originally created with mutual funds, but as there are now more exchange-traded funds (ETFs) available in the market, ETFs are increasingly being included because of their transparency and diversity of strategy.
Why models are gaining in popularity
Today, models have become essential tools for financial advisers as they present multiple features.
They have enabled advisers to balance operational demands with personalised client engagement. Once largely a solution for small accounts, models have now turned into a core holding in accounts of all sizes1.
In Australia, investors holding assets in model portfolios expressed greater satisfaction with transparency, issue resolution and portfolio optimisation2. Additionally, they were also more content with the fees they pay for the value of services they receive from advisers.
How ETFs and models can combine forces
Models that include ETFs are gaining ground among investors with structural features of ETFs, such as transparency, liquidity and other efficiencies becoming more prominent.
As illustrated, asset weighted average allocations show that ETFs now make up about 46%3 of models. As ETFs became more versatile, hybrid model portfolios that combine mutual funds and ETFs have emerged. These models present improved transparency of holdings and differentiation, enabling asset managers to better understand their models and address client needs.
The next major wave of models, which we believe is in its early stages, will be ETF-only models that feature a mix of active and passive ETFs1. Globally, ETFs hold about US$16.7 trillion in assets and active ETFs hold about US$1.4 trillion4. As active ETFs gain further momentum, they can provide more diversification and flexible opportunities when added to strategic asset allocation models while still keeping costs low.
It’s a dynamic mix
We expect the growing preference for customisation will likely be one of the biggest trends in the next leg of model portfolio adoption, facilitated by the vast array of ETF offerings that bring differentiation and diversification1.
For model managers, with this expanding toolkit, their challenge is to identify the exposures that matter and integrate them in a way that drives meaningful outcomes for investors. Technology, including artificial intelligence, will help their efforts.
For some financial advisers, custom portfolios are an opportunity to gain the benefits of models while having a greater say in the portfolio design. This evolution addresses the concerns many advisers had about losing autonomy in portfolio creation.
Conclusion
As technology advances and client demands grow more sophisticated, further innovation is likely in product development and service delivery models. Asset managers who embrace these trends and develop comprehensive solutions are expected to be well-positioned to capture market share.