Model portfolios have become a key to success for exchange-traded funds. Entry into a model or an allocation shift can send assets surging into individual ETFs, critical for gaining traction in a market that saw nearly 750 new products launched in 2024.
With net inflows of $1.1 trillion last year, total U.S. ETF assets under management topped $10.5 trillion across nearly 4,000 funds, according to data from FactSet Research Systems. While most of the assets and flows rest with long-tenured equity index funds and broad-based bond funds, a handful of newer offerings found their footing thanks to model inclusion.
The $13.7 billion iShares U.S. Equity Factor Rotation Active ETF from BlackRock added $11.7 billion in assets in 2024 after being included in the firm's model portfolios in January 2024. Models are most often accessed by financial intermediaries building individual client portfolios in both taxable and non-taxable accounts.
Now cryptocurrency investors are waiting eagerly to see how and when BlackRock may add the $54 billion iShares Bitcoin Trust ETF to its published models. (The company dropped hints about potential model inclusion throughout the year, including in a mid-December market commentary titled “Diversifying our portfolio diversifiers.”)
ETF model portfolios may have helped fuel recent ETF asset growth at J.P Morgan Asset Management, Capital Group, BNY Mellon and Dimensional Fund Advisors, among others. Capital Group, for example, began including ETFs in its American Funds tax-aware model portfolios in September 2023, and added additional ETFs in July 2024. The Capital Group Active-Passive Retirement Income models have also shifted more to ETFs in the past two years.
Coming up on three years in the ETF business, Capital Group ETFs added $25.9 billion in net inflows in 2024 to close the year at just under $50 billion in ETF assets, according to FactSet.
J.P. Morgan added $44.4 billion to end 2024 with $184 billion in AUM, while Dimensional added $38.4 billion in net flows to close with $170 billion in ETF assets.
Targeting risk
ETF models tend to target risk levels across asset classes, but are also used for specific objectives and exposures, as well as target-date retirement portfolios.
Many large asset managers with a significant ETF product set now publish the components of ETF-only and blended ETF and mutual fund portfolio models on their own websites, at third-party data aggregators such as FactSet, Morningstar, and Bloomberg, and for use on wirehouse platforms, broker-dealers, and adviser technology systems. And it’s not just home cooking; models published by asset managers often include ETFs from other providers where appropriate.
Broadridge Financial Solutions has sized the U.S model portfolio market at $6.9 trillion as of Sept. 30, with roughly 52% of assets in ETFs, up from 48.7% at the end of 2022, and expects the U.S model portfolios market will grow to $11.8 trillion by the end of 2028, with the largest growth continuing in ETFs. Broadridge notes that ETFs account for 52% of all model assets, while the broader U.S. market share is 30.6% of the total $36.5 trillion industrywide '40 Act funds.
“Since the end of 2022, ETF assets have surged 50.5%, indicating growing interest from long-term investors who value ETFs for their diversification, high liquidity and cost-effectiveness,” said a spokesperson for Broadridge, which tracks $3.2 trillion in model portfolio assets. “This trend reflects a shift towards investment options that balance risk and return.”
According to Broadridge, the number of model portfolios built purely from ETFs currently sits at 38% of all model portfolios, up 20% since the end of 2022. In contrast, mutual fund-only models fell by 20% over the same time period.
Forty-nine percent of U.S. financial advisers surveyed in 2024 by State Street Global Advisors Research Center said they either use model portfolios or build custom portfolios for clients, compared to 25% in 2019. Only 4% said they use “standard model portfolios,” essentially off-the-shelf models without any customization, compared to 10% in 2019.
This dynamic of customization is what makes model proliferation so difficult to track, as well as how they may be reaching ultra-high-net-worth investors and small to medium foundations and endowments.
Hilary Corman, head of U.S. institutional for SPDR ETFs at State Street Global Advisors, said that SSGA is seeing increased usage in these markets as well as single-family offices.
“Single-family offices utilize the model wrapper to leverage top asset manager capabilities and create a diversified portfolio suited to their desired outcomes and benchmarks,” said Corman, adding that ETF models are often used alongside less-liquid exposures such as private equity.
Tim Holland, chief investment officer at wealth-management technology firm Orion, said he’s also observed the “barbelling” of low-cost, liquid ETF portfolios with riskier, less-liquid exposures.
Orion currently services over $90 billion of assets within its broader wealth business, including approximately $17 billion in assets on its “Tier One” wealth management platform, Orion Portfolio Solutions. On the platform, Orion provides high touch, deep due diligence on third-party strategies as well as additional investment support to adviser clients.
Of that $17 billion, approximately $11 billion resides in mutual funds, with about $9 billion in mutual fund model portfolios. About $4 billion resides in ETFs with nearly all of it in model portfolios, according to Holland.
“It’s a notably growing segment within Orion’s wealth offering,” Holland said. “Advisers view it as a comprehensive solution that aligns risk and return with liquidity and transparency,” said Holland.
