As model portfolios make headway with financial advisors, providers continue to add new products to their models. What product tops the list of must-adds? Active ETFs, according to a survey of providers included in Morningstar’s 2025 Model Portfolio Landscape Report. Morningstar senior principal Jason Kephart discusses why that is and what other products are likely to begin appearing in more model portfolios soon.
Susan Dziubinski: You and your colleagues surveyed 30 asset managers about what they plan to add to their model portfolios in the next few years. What was the most popular response?
Jason Kephart: Active ETFs are at the top of model portfolio provider shopping lists: All the firms we surveyed expect to add active bond ETFs, and only one doesn’t expect to add active equity ETFs.
Dziubinski: How large a role do active ETFs play in model portfolios today?
Kephart: As of March 31, 2025, 44% of model portfolios include at least one active ETF. The average allocation to active ETFs in those models is 33%. And in fact, 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.
Dziubinski: Why do you think asset managers are embracing active ETFs in their models?
Kephart: Active ETFs can be a great way for model portfolio managers to stand out, especially since many early model portfolios relied heavily on index-based options. They usually cost less than traditional actively managed mutual funds, which helps keep overall expenses down while still giving managers the flexibility to add active management at the security level. There have been some compelling active ETFs launched, both for equity and fixed income, and we expect to see this trend continue.
Dziubinski: Your survey found that model providers plan to add separate accounts to their lineups in the next few years, too. What’s the rationale?
Kephart: Separately managed accounts and direct indexing are becoming popular tools to make model portfolios more tax-efficient and customizable. Since tax efficiency is a big deal for high-net-worth investors, these features could make model portfolios a lot more appealing to them. The ability to put custom constraints on a separate account or direct indexing is a secondary bonus feature. Investors with large, concentrated positions in a single stock, for example, could ask for it to be removed. It used to be that models weren’t really seen as a fit for wealthy clients, but that’s starting to change, with more models now being built specifically with those investors in mind.
Dziubinski: There’s been a lot of talk in the financial media recently about the convergence of public and private markets. Are providers looking to add more private market exposure to their models?
Kephart: Yes, through semiliquid funds, like interval funds. Interval and tender-offer funds, along with nontraded real estate investment trusts and business-development companies, offer access to private markets, like private equity, private credit, and real estate. These semiliquid funds are often available to investors who don’t meet the high-income requirements of traditional private drawdown vehicles. Many interval funds have no suitability requirements.
Dziubinski: How do semiliquid funds work, and what are their costs?
Kephart: Semiliquid funds provide periodic liquidity (typically quarterly) up to a small percentage of the fund’s net assets (usually 5%). Since there’s only limited liquidity, these funds can own substantial amounts of less liquid securities, like private equity and private credit. They are not subject to mutual funds’ 15% cap on illiquid securities. But interval funds aren’t cheap. The average prospectus-adjusted expense ratio for interval funds’ cheapest share class was 2.30% at the end of May 2025, and they may also include incentive fees on income.
Dziubinski: Do any providers currently offer model portfolios with private markets exposure?
Kephart: We’re seeing a flurry of new model portfolios launch with dedicated exposure to private markets. BlackRock, Fidelity, Goldman Sachs, Franklin Templeton, and State Street have all launched models with private markets exposure, and we expect more to follow.
Dziubinski: What about bitcoin: How interested are providers in adding crypto to their models?
Kephart: Despite the surge in demand for bitcoin ETFs since they launched in January 2024, few model portfolio providers expect to add them over the next three years. BlackRock’s model portfolio team did add the firm’s popular iShares Bitcoin Trust IBIT to its model portfolios with alternatives in early 2025, but only the model portfolios that include strategic allocations to alternative strategies, which suggests the firm doesn’t yet see the ETF having a role in the average portfolio.