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Model portfolios drive ETF growth, Cerulli says
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In the United States, model portfolios have driven growth in exchange-traded fund assets as ETFs have cemented their place as an “important building block” for models, a report shows.
Asset managers and third-party strategy model providers have an allocation of approximately 54 percent to ETFs, a report by Cerulli Associates shows.
About 12% of financial advisor assets are held in “practices that primarily use model portfolios as their portfolio construction process,” but Cerulli estimates that 24% of assets within practices are considered “model portfolio targets,” the report notes.
These practices start with templates and then make modifications or customizations based on each client, Cerulli said.
This article was previously published by Ignitea title belonging to the FT group.
ETF Assets exceeds mutual fund assets within the models in April.
“The industry will continue to see adoption of the model as wealth manager headquarters push advisors toward them and advisors realize the resulting benefits,” Matt Apkarian, managing partner at Cerulli, said in the report.
Third-party model portfolio assets reached $424 billion by mid-2023, a 48% increase from two years earlier, according to a February report report from Morningstar.
Black rock is the largest model provider, with $84.3 billion in model assets as of June 30, 2023, while Capital Group is the second largest, with $75.4 billion as of the same date.
But the use of ETFs within models is not limited to model providers integrating their own ETFs into model portfolios, the Cerulli report notes.
Approximately 31.4% of model portfolio assets are in proprietary ETFs, and 27.1% of model portfolio assets are in non-proprietary ETFs.
WisdomTree, a provider of templates and FNB The issuer could power a model with only proprietary ETFs, but advisors and clients are largely wary of a single-issuer portfolio, said Thomas Skrobe, head of portfolio solutions at WisdomTree.
The company had $3.5 billion in working capital assets as of March 31, compared to $3.2 billion at the end of 2023.
WisdomTree is “closing” to $4 billion in model assets, 65% of which are in its ETFs and the rest in non-proprietary products, Skrobe said.
“We expect ETFs to become more prominent in model portfolio construction as new products begin to reach their three- and five-year histories, which are typically required for consideration,” Apkarian said.
Some of these new entrants to the ETF market, such as AllianceBernstein, Capital Group and T Rowe Price, have ETFs approaching that track record, Skrobe said.
This will allow model providers that use ETFs to allocate to well-known asset managers that advisers are familiar with, he said.
AllianceBernstein provides actively managed ETFs, mutual funds and separately managed funds to model managers who have a propensity for the efficiency that comes with the ETF wrapper, according to Noel Archard, its global head of ETFs.
The firm considers active ETFs to be one of the best “entries” into home office and third-party strategist models.
“The growing adoption of models has been largely driven by the rise of fee-based advice and increased demand from wealth managers for home-office and strategist models following the global financial crisis,” Archard wrote in an email.
The models allow advisors to focus their time on service and business development to create scale in their practices, rather than making individual investment decisions, he wrote.
But not all model providers are eager to add active ETFs to their models.
The higher fees of active ETFs, compared with their passive counterparts, could put off investors, noted William Roach, president of model provider Globlalt.
Active or not, Roach expects model delivery to be “one of the fastest growing pipelines” in asset management because of the time and effort it saves advisors.
Archard highlighted the increasing use of ETFs with separately managed accounts within the same model portfolio, creating additional room for customization if needed.
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And customization within models is one of the biggest emerging trends in the space, Skrobe said.
Overall, the firm’s resources, including model portfolios and external sponsor models, are influencing advisors and further driving ETF adoption, Apkarian said.
“Given the industry’s shift toward model portfolios, ETF providers should seek investment opportunities within proprietary and third-party model portfolios,” he said.
*Ignites is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignites.com.