Capital Group enters active ETF model portfolio fray

Capital Group, the world’s largest active asset manager, is entering the growing market for model portfolios built entirely with actively managed exchange-traded funds.

The Los Angeles-based firm, which oversees $2.8 trillion in assets, is launching eight new model portfolios constructed exclusively from its own active ETFs.

The move follows a similar step by Dimensional Fund Advisors, as asset managers increasingly embrace ETFs as a tool for financial advisors seeking cost-effective and tax-efficient investment solutions.

“This isn’t a novel solution; Dimensional already offers active ETF models. But this is the big trend in models, and we’re going to see a lot more active ETF models going forward,” Bryan Armour, director of passive strategies research, North America, at Morningstar, told the Financial Times.

Model portfolios have gained substantial momentum among financial advisors, particularly as pre-constructed fund allocations tailored to different risk levels or investment goals offer opportunities to scale up or expand their services.

"We know nearly two-thirds of the highest growth financial professionals incorporate models into their practices, which can afford them more time with their clients," Holly Framsted, head of Product Group, Capital Group, said in a statement Tuesday.

According to research published in December by State Street Global Advisors, advisors in the US now allocate 39 percent of client assets to model portfolios, up from 32 percent three years ago.

A September snapshot from Broadridge found advisors leading the way in model portfolio adoption, representing nearly three-fifths of the $3.8 trillion total AUM in the space at the time. 

The rise of active ETFs has further fueled this trend. Actively managed ETFs accounted for 28 percent of all US ETF net inflows last year, bringing their total market share to 8.1 percent. One analysis by National Bank found active ETFs accounted for most of last year's launches, with the 565 newly listed active products accounting for 77 percent of ETF debuts in 2024.

Traditionally, model portfolios were built using mutual funds, but the growing availability of actively managed ETFs is reshaping the space in real time. Broadridge's September research noted that ETF assets overtook mutual funds within model portfolios for the first time in 2023, a trend that continued into 2024. By the second quarter last year, ETFs comprised 53 percent of model portfolio assets, just edging out the 47 percent share held by mutual funds.

Capital Group’s strategy

Capital Group’s new offering consists of eight model portfolios, ranging from Global Growth to Conservative Income, all built using its 22 active ETFs, which collectively manage $53 billion in assets. The firm estimates that 35,000 financial advisors currently use its ETFs.

The company already has $62 billion in existing model portfolios that incorporate a mix of its mutual funds, active ETFs, and third-party passive ETFs from firms such as Vanguard, BlackRock, and Schwab.

By shifting to an all-active ETF approach, Capital Group aims to leverage ETFs’ lower fees and tax advantages over mutual funds.

“ETFs have grown in their importance, in particular for taxable accounts,” Framsted told the Times. She added that launching all-active ETF models was the “number one question we have received since bringing ETFs to the market” in 2022.

Competition and market dynamics

The US model portfolio market remains dominated by broker-dealers such as Edward Jones Investments, Merrill Lynch, Morgan Stanley, JPMorgan, and LPL, which control 75 percent of the space through proprietary models offered via their advisor networks. However, asset managers and third-party providers have been taking territory, capturing all net inflows in recent years.

According to Matt Apkarian, associate director of product development at Cerulli Associates, the five largest asset manager-operated model portfolio providers – BlackRock, Wilshire, Capital Group, Vanguard, and Russell Investments – collectively manage $257 billion.

“Advisors increasingly have a preference for asset management models. There are more models available, and advisors have manager preferences,” Apkarian told the Times.

Not every advisor's ready to take the plunge, however. In a research report published February, Morningstar found 27 percent of advisors it surveyed are not ready to give up control of their investment management to a model provider.

"The biggest reasons given for not offering models was a preference for customized portfolios and a desire for control over investment decisions," the report said.