For the investment community, financial advisors, and asset managers, model portfolios have quickly become the standard bearer for investing strategies. After all, these easily packable and customizable allocation strategies, which offer replication, have revolutionized the asset management business. Today, nearly $700 billion in assets sits in model portfolios. Exchange-traded funds (ETFs) have been a major contributor to that growth.
And now active ETFs are stealing the show.
According to a new Morningstar report, active ETFs are quickly gaining market share and importance in various model portfolios. With the growth of models continuing to expand at a prolific pace, active ETFs’ accession into real portfolio tools is assured.
Model Portfolio Adoption
Arguably, the most important piece of building a portfolio is having an allocation plan and sticking to it. Deviations from that allocation can skew risk and significantly alter expected returns, resulting in a range of problems. It’s here that model portfolios have grown in prominence.
By its basic definition, a model portfolio is simply a collection of assets and investments designed to meet end goals. They can serve as a framework for asset allocation and diversification. Here, investors can utilize a model to construct this collection of asset classes, following a framework developed by the underlying asset manager or financial advisor.
What it does is provide a set of guide rails to keep within a specific framework. And investors and advisors seem to love them. According to Morningstar, there are now more than 30 third-party model providers in the U.S.. As of the end of June 2025, more than $645 billion of investors’ assets are allocated to model portfolios. This is a 62% increase since Morningstar’s last model portfolio survey, done in June of 2023. 1
Active ETFs Are Now Standard
ETFs have played a significant role in driving growth in model portfolios. Offering low costs and the ability to own vast swaths of asset classes with one ticker, ETFs have become the preferred vehicle for models. Investors and their advisors can quickly and effectively build a basic asset allocation. Moreover, the trading of ETFs and the creation/redemption mechanism make it easy for advisors, wirehouses, RIAs, and asset managers to buy allocations for their entire client base at one time, thereby reducing costs and time.
Additionally, ETFs have also allowed advisors and investors to get more exotic with their allocations. Because ETFs have continued to democratize asset classes, average investors can quickly add esoteric asset classes, such as commodities, real estate, or even Collateralized Loan Obligations (CLOs), to their portfolios.
Now, increasingly, active management is becoming a model staple thanks to ETFs. That’s the gist, according to Morningstar’s new 2025 US Model Portfolio Landscape Report. Surveying 30 different model providers, the investment researcher found that 44% of the models already own at least one active ETF. At the same time, models allocate around 33% of their assets to active ETFs.
Growth of active ETF models has been impressive as well. This chart from the report looks at new model launches. The predominantly active models are outpacing passive index-focused ones and blended active/passive models. The authors of the Morningstar report say that “most new model portfolios that have been launched so far this year have primarily featured active funds, reversing the recent trend of blended active/passive allocations.”
Source: Morningstar
The outlook could even be rosier for active ETFs. The survey revealed that over the next 36 months, nearly all of the 30 model makers surveyed plan to add active equity and active bond ETFs to their models.
You can see this in practice. BlackRock has continued to add its active ETFs to its model portfolios, including some ignored funds. For example, iShares U.S. Thematic Rotation Active ETF (THRO) now has $4.9 billion in assets. Before being added to models, it barely had any assets. Capital Group, Fidelity, and DFA have all followed a similar path, using active ETFs as the bedrock for their model portfolios.
According to the report, “Active ETFs offer differentiation, helping model portfolio managers stand out from the largely index-based offerings that dominated the early model portfolio boom.”
A Major Win For Investors
That differential comes with better potential outcomes. Morningstar highlights the fact that active ETFs are typically less expensive than actively managed mutual funds. That’s great for potential returns.
Historically, the problem has been that mutual funds and other active investment vehicles have been more expensive to own compared to index funds. This is the widely known “fee hurdle problem.” Most active managers can beat the market. However, those extra gains are only a few fractions of a percentage point per year. Investment costs are deducted directly from returns. If a fund charges high expenses, a manager must consistently cover that amount to generate additional returns for the fund’s shareholders. For expensive mutual funds, that’s been a poor proposition.
However, the lower fee hurdle of active ETFs—sometimes lower than that of passive funds—enables this outperformance to be realized. Moreover, the lower costs have allowed managers to explore systematic and other quantitative strategies cheaply and efficiently. This has brought outperformance to the masses and model portfolios.
The second win for active ETFs in models is taxes, according to Morningstar. In a perfect world, rebalancing would be a tax-free event, but that’s not the case. Investors using mutual funds are responsible for paying taxes as the fund rebalances. But thanks to their structure, ETFs are different. The secondary market and authorized participant structure enable tax pass-through and avoidance for portfolios. Investors only pay gains tax when they choose to do so and sell their shares. As such, active ETFs are far more tax-efficient.
Finally, cash drag is eliminated. Because managers don’t have to hold cash, unless they want to meet investor redemptions or share sales, they can be fully invested in the assets of their choice. This allows them to have better returns than a mutual fund with the same strategy. You can see this with copycat ETFs and their mutual fund sisters.
With these factors in mind, model portfolios that incorporate an active approach can outperform those that are simply passive in theory. As such, it’s easy to see how and why active ETFs are quickly becoming a significant part of the model portfolio movement. Going forward, active ETFs will find their way into more models. For investors, that’s ultimately a good thing.
Bottom Line
Model portfolios and ETFs often work in tandem. Increasingly, it’s active ETFs that are making their way into models. According to Morningstar’s new survey, active ETFs are dominating model allocations. For investors and advisors, that’s a win-win.
1 Morningstar (June 2025). 2025 US Model Portfolio Landscape Report
