Model Portfolio Insights

As financial advisors continue to evolve their offerings, new products are continually being integrated into model portfolios. So, what’s currently in demand? According to a report by Morningstar, active ETFs are leading the charge among must-have products. Morningstar Senior Principal Jason Keffert shared insights into why these products are gaining traction and what other options we might see in model portfolios soon.

Susan Ziubinski: You’ve surveyed 30 asset managers about their future model portfolio additions. What was the overall response?

Jason Keffert: Active ETFs are definitely at the forefront. Almost all the companies we interviewed plan to incorporate active bond ETFs, and only one individual expressed skepticism about adding active equity ETFs.

Ziubinski: How significant are active ETFs in the current landscape of model portfolios?

Keffert: By March 31, 2025, 44% of model portfolios included at least one active ETF, with an average allocation of 33%. Actually, many new model portfolios launched this year prioritize active funds, which is a shift from the recent preference for passive strategies.

Ziubinski: What makes asset managers enthusiastic about including active ETFs in their models?

Keffert: Active ETFs provide a unique edge for portfolio managers, especially since many earlier models leaned heavily on index-based options. They tend to be more cost-effective compared to traditional mutual funds, allowing managers to incorporate active management choices at the security level. There are compelling new active ETFs being introduced in both stocks and bonds, and it’s likely this trend will persist.

Ziubinski: Your research indicates that model providers intend to incorporate separate accounts. Why is that?

Keffert: Separate accounts and direct indexing are becoming essential for enhancing the tax efficiency and customization of model portfolios. This is particularly appealing for affluent investors concerned about tax implications. Moreover, the flexibility to impose custom restrictions on accounts or directly index is a nice added benefit. For instance, investors holding concentrated positions in a specific stock may wish to exclude it. Model portfolios have typically been viewed as unsuitable for wealthy clients, but that’s changing as designs increasingly cater to them.

Ziubinski: There’s been a lot of chatter about the merging of public and private markets lately. Do providers want to include private market exposure in their models?

Keffert: Yes, they are considering semi-liquid funds like interval funds. These creates pathways to private markets (think private equity or real estate) without imposing high-income barriers typical with traditional investment vehicles. Many interval funds have more accessible requirements.

Ziubinski: Could you clarify how semi-liquid funds operate and what the cost structure looks like?

Keffert: Semi-liquid funds typically offer liquidity on a regular basis—usually quarterly—up to a small percentage of the total fund value (around 5%). Because of this limited liquidity, they can hold significant amounts of more illiquid securities, but they aren’t without cost. As of late May 2025, the average expense ratio for the cheapest equity class of interval funds was around 2.30%, which can also include performance-related fees.

Ziubinski: Are there currently any providers that offer model portfolios with a focus on private markets?

Keffert: Yes, the number of new model portfolios dedicated to private market exposure is on the rise. Big names like BlackRock, Fidelity, Goldman Sachs, Franklin Templeton, and State Street are all launching models that target private markets, and they’re eager to expand further.

Ziubinski: What about cryptocurrency? How does the provider feel about integrating crypto into model portfolios?

Keffert: Even with the rising interest in Bitcoin ETFs since their introduction in January 2024, very few model portfolio providers are planning to add them over the next three years. Although BlackRock’s model portfolio team added the iShares Bitcoin Trust IBIT among their alternatives in early 2025, typical model portfolios tend to prefer strategic allocations to other alternative strategies, leaving Bitcoin ETFs outside the mainstream.