Chief ETF Strategist
ETF Strategist
In today’s Age of Convenience, the appetite for products and services that simplify and enhance daily life is stronger than ever. Technological advancements, digital transformations and innovative solutions that prioritize user-friendliness, speed and accessibility are reshaping industries and the economies in which they operate. The investment landscape is fertile ground for this convenience trend, with the rapid growth of exchange-traded funds (ETFs) cultivating new opportunities for asset managers and financial advisors. For many investors, ETFs have become their preferred investment structure due to their accessibility and flexibility.
Also gaining favor amid the search for convenience are model portfolios, which offer enhanced portfolio oversight, operational efficiencies and, increasingly, an ability to utilize the structural benefits of ETFs. In this piece, which is the first in a series of explorations into the dynamism of ETFs, model portfolios and their intersections, we highlight:
- The accelerated growth of the ETF industry due to their innovative investment structure: Since 2020, the U.S. ETF market has experienced a compound annual growth rate (CAGR) of 19% and is projected to double in size, reaching $20 trillion by 2030.
- The evolution of model portfolios and the ETF effect on their composition: The advantages of the ETF structure, such as transparency, liquidity and tax efficiency, have driven their increased adoption in models, as evidenced by 93% of third-party strategists' allocations being directed toward ETFs.
- The ETF and model portfolio trends that we expect to help redefine investment management: Customization of models, by utilizing active ETFs and leveraging technology such as AI, offers a distinct advantage for advisors, allowing them to focus on building deeper client relationships and crafting personalized portfolios.
ETFs: The Investment Structure of Choice
Assets into ETFs have skyrocketed. In the United States, ETF assets have grown from less than $2 trillion a decade ago to over $10.5 trillion. Globally, they have increased from about $2.6 trillion to over $15 trillion. In our view, this growth trajectory is still in its early stages. By 2030, we expect the U.S. ETF market to nearly double to $20 trillion and the global ETF market to hit $30 trillion.
U.S. ETF assets projected to reach $20 trillion by 2030
The sheer number of ETFs in the marketplace now illustrates their growing influence. In 2024, nearly 750 new ETF products launched, bringing the total number of funds to approximately 4,000, doubling from just 5 years ago. ETFs’ structural pillars—accessibility, transparency, liquidity, cost-effectiveness and tax efficiency—make them a more modern and convenient alternative to their main counterpart, the traditional, comparatively limited mutual fund. Over the past five years, ETFs have gained market share with consistent yearly inflows, while flows into mutual funds have been uneven, including outflows in four of those five years. As adoption continues to grow, we anticipate that ETF assets will surpass mutual fund assets by 2030.
U.S. ETF markets share vs. mutual funds
Model Portfolios: Gaining Popularity
Effectively managing portfolios and risk while asset gathering is not a part-time job. It’s certainly possible, but it’s far from easy. Enter model portfolios, the adoption of which has accelerated for many reasons, principally the efficiency and operational advantages that come from outsourcing the investment component.
Once largely a solution for small accounts, models have become a core holding in accounts of all sizes. While 73% of advisors still prefer using models for clients with assets under $500,000, this trend has also extended to larger clients. Currently, 45% of advisors surveyed use models for clients with investable assets between $500,000 and $5 million. Helping this transition is the enhanced risk management, trading and rebalancing efficiencies that models now offer, making them more integral and effective in diverse financial portfolios.
According to market research firm Cerulli Associates, asset allocation models currently account for $1.8 trillion, a figure that is projected to exceed $2.9 trillion by the end of 2026. With financial advisors increasingly focusing on financial planning and partnering with asset managers to help with investment management, asset managers must consider how to capitalize on this growing distribution opportunity.
The top model providers are heavily dominated by wirehouses, which may not be available to all investors. In recent years, assets into the growing independent broker dealer (IBD) channel have increased significantly. Platforms like Orion and Envestnet now offer registered investment advisors (RIAs) access to a wide range of solutions, marking the end of an era where a single model center dominated the scene. Clients have and will continue to gain even more access through various democratized platforms.
ETFs and Model Portfolios: A Dynamic Mix
In their early days, ETFs were simple beta products, but over time ETFs matured into a sophisticated universe of diverse investment vehicles with highly specialized exposures. That expansion turned ETFs into attractive components for model portfolios, which historically were built with mutual funds.
ETFs’ structural pillars combined with their increasing diversity are effective building blocks for model construction, standing in contrast to mutual funds. For example, mutual funds are only required to report their holdings quarterly. Unlike ETFs, asset managers can’t see portfolio holdings in real time and are limited to trading once per day. For asset managers, mutual funds’ lack of transparency compared to ETFs means added guesswork.
As ETFs became more versatile, hybrid model portfolios that combine mutual funds and ETFs emerged. These models offer improved holdings transparency and differentiation, enabling 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 ETFs. Many ETFs, specifically active ETFs, that were previously unavailable on platforms, are now accessible, having met the required AUM and track record thresholds. This evolution of models reflects a growing interest from long-term investors, who increasingly understand the benefits and value that ETFs can bring to their portfolios.
Many firms across the industry have successfully integrated ETFs into their model portfolios, with active ETFs becoming a larger component in recent years. As of the end of 2023, mutual funds still constituted 51.5% of asset managers’ model portfolios. In contrast, third-party strategists largely avoid mutual funds and prefer ETFs, which account for over 93% of their allocations. Separately managed accounts (SMAs) currently represent only about 3% of model assets. While managers are eager to incorporate illiquid and semi-liquid alternatives into model portfolios, the operational challenges of delivering true models without daily liquidity have only recently led to their emergence as paper model solutions.
Emerging Trends: Customization, AI and Operational Efficiency
We expect the growing preference for customization to 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 diversification. The appetite for both blended and ETF-only models is rising, given ETFs’ ability to target various risk levels across asset classes and specific investment objectives.
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 AI, will help their efforts. For example, the increasing number of available models and ETFs can lead to information overload, but many asset managers have enhanced their digital model ecosystems to improve accessibility, usability and efficiency. These platforms are centralized hubs for model managers to report the holdings of their blended and ETF-only models, which often incorporate ETFs from other providers. These platforms, enhanced by AI, allow investors to easily understand the exposures within models and subscribe to allocation changes, enabling advisors to seamlessly integrate models into their practice.
For financial advisors, custom portfolios are an opportunity to reap the benefits of models while having a greater say in the portfolio design. This evolution addresses the concerns many advisors had about losing autonomy in portfolio creation. The flexibilities that ETFs offer help advisors engage clients with unique or previously unavailable exposures, such as thematic and tactical tilts. Such engagement will be critical, because when AI wields its influence at scale, an advisor’s value will not be picking ETFs and building portfolios, which AI can do in a cost-effective way. AI will also make it much easier for clients to access the market data and insights they used to get from advisors. Where advisors can provide value is by building deeper relationships with their clients to help them identify and design more personalized portfolios capable of meeting their investment goals.
Another trend is the intersection of technology with distribution for asset gathering. Additionally, trading and capital markets are areas that should be embraced and understood, as they play key roles in accelerating awareness of and demand for model portfolios. Financial advisor teams and CIO offices that build and trade models need to work closely with trading desks to ensure effective trading, especially given the size and scale that some have achieved. These advancements allow ETFs to trade more efficiently, with cost savings passed along to the investor.
What’s Next: The Future of Investment Management
The synergies between ETFs and model portfolios and the modern investing conveniences that their integration provides create a more efficient, accessible and customizable investment management landscape. As technology advances and client demands grow more sophisticated, we expect further innovation in product development and service delivery models. Asset managers who embrace these trends and develop comprehensive solutions will be well positioned to capture market share. For advisors, navigating these transformations with a human touch can differentiate their value-add to their clients, particularly amid market uncertainty.