Model portfolios fuel ETF growth spike in US adviser channels

ETF usage is growing exponentially in the US, aided in no small part by increased adoption by Registered Investment Advisors who are all-in on the model portfolio phenomena.

The rise of ETFs in US investment markets continues unabated, with various channels of the US advisory chain increasing client portfolio allocations to index funds amidst growing acceptance of model portfolios as the most efficient vehicle for investment operations.

ETF asset growth has been “nearly unparalleled” in the US during the past decade according to Boston-based wealth management consultants Cerulli Associates, with advisers behind a large part of that growth. Collectively, retail financial advisory channels own 66 per cent (US$4.3 trillion) of total ETF assets in the US at year-end, 2022.

Allocations to ETFs are at all-time highs through all of these US advise channels, with the least conflicted advisers operating under the US model leading the way. Registered Investment Advisors (RIAs) have the highest ETF usage, forecasting a 39 per cent allocation moving forward, while independent broker/dealers intend to allocate 22 per cent. RIAs have a fiduciary duty to put the client’s best interests first, while broker/dealers do not and tend to operate under more product aligned models in the US.

Yet non-aligned advice isn’t the only driver of ETF usage, Cerulli reports, with the rise of model portfolios and the utility of ETFs within them an equally important factor.

“Further catalyzing ETF flows are asset allocation model portfolios – where ETFs have cemented placement as an important building block,” Cerulli stated, adding that asset managers and “third party strategist model providers” have an approximate 54 per cent asset-weighted average allocation to ETFs.

And while just 12 per cent of adviser directed portfolio assets are held within practices that primarily use model portfolios, Cerulli estimates there are 24 per cent of assets within practices that are considered model portfolio targets. That means the move towards model portfolios, and the consultants running the money behind them, is set to continue.

“The industry will continue to see model adoption as wealth manager home offices push advisors toward them – and advisors realize the resulting benefits,” commented Matt Apkarian, associate director at Cerulli.

“Overall, firm resources including model portfolios and external sponsor models all have the potential to influence advisors and further spur ETF adoption,” Apkarian continued. “Given the industry movement toward model portfolios, ETF providers should seek opportunities for placement within proprietary and third-party model portfolios.

“We expect the ETF to feature more heavily in model portfolio construction as newer products begin to hit their three- and five-year track records, which are typically required for consideration.”