Model portfolio: A better way to invest?
Like their equity market counterparts, fixed-income investors increasingly view ETFs as essential tools for portfolio stability. ETFs have also fuelled the rise of model portfolio strategies—pre-designed investment approaches that combine a recommended collection of assets (stocks, bonds, ETFs) aimed at specific investment goals.
These strategies typically blend core holdings, such as broad-market index ETFs or core fixed-income ETFs, with tactical tilts—adjustments intended to capture short-term market opportunities. In these largely investor-managed portfolios, core fixed-income ETFs often represent about 80% of assets, with the remaining 20% allocated to tactical shifts. This structure allows investors to build resilient portfolios that adapt to changing market conditions while preserving long-term stability.
As model portfolios gain traction over pricier, less flexible mutual funds, ETFs—both core and tactical—play a more prominent role. Projections show that assets managed through model portfolios could grow from $5 trillion in 2023 to $11 trillion by 2028.
“There’s a significant migration of assets from actively managed mutual funds to ETFs, driven by ETFs’ tax advantages, liquidity, and transparency,” says James Seyffart, Research Analyst at Bloomberg Intelligence. The rise of model portfolios also reflects a broader trend: fixed-income ETFs are increasingly integrated into strategic investment frameworks as asset managers respond to growing investor demand for customizable solutions.
Thematic fixed income ETFs: Active or passive?
As investors’ awareness increases, demand for targeted fixed-income ETFs is also rising. Thematic and sector-specific ETFs—such as high-yield bond ETFs or those focused on industries like technology—enable investors to access specific market niches or strategies. This customization is especially valuable in volatile markets, where traditional broad-based bond funds may not fully address evolving investor needs. “As demand for flexible, targeted fixed-income ETFs that better reflect modern risk dynamics, we’re seeing more offerings designed for specific durations, sectors, and risk profiles,” says Joanna Gallegos, Co-Founder of BondBloxx.
As with equity, the debate over active versus passive management rages on, especially after the bond market stress of 2020, when COVID-related disruptions highlighted ETFs’ relevance. “When bond markets froze, ETFs offered liquidity and price discovery, emerging as essential tools for risk management, with significant trading volumes and real-time pricing advantages,” says Steve Laipply, Global Co-Head of iShares Fixed Income ETFs for BlackRock.
While investors quickly embraced passive ETFs tracking broad market indices, there’s now rising interest in actively managed fixed-income ETFs that offer flexibility and tactical opportunities. “I’m not sure the traditional dichotomy between active and passive investing is still relevant,” says Laipply, noting that both strategies can coexist within a single portfolio. “We’re seeing investors use active ETFs passively as core holdings, while employing index ETFs actively to express market views,” adds Tara Talone, Senior Portfolio Manager at Vanguard. Ultimately, it’s about having access to diverse risk analytics and fixed-income instruments to manage flows effectively while reducing costs for clients.
Time to cash in on cash reserves?
A key factor accelerating the adoption of fixed-income ETFs is their appeal to cash-rich investors who might turn to these ETFs as a way to generate income while preserving liquidity. Although such investors might still favour money market funds, rising interest rates and inflation are shifting investor psychology, prompting a re-evaluation of fixed income’s role in portfolios where cash yields minimal real returns. As a result, the steepening of yield curve may lead to a greater reallocation toward fixed income, for diversification and income stability purposes.
In addition to offering investors the chance to generate better yields, fixed-income ETFs can sidestep the risks of more volatile instruments—all without sacrificing liquidity. “Many investors accustomed to low rates are missing out on fixed-income opportunities instead of leveraging them to capture the strength of the U.S. economy across different points on the curve with precise duration,” adds Gallegos.
This role as a cash alternative is further reflected in the rise of ultra-short ETFs as core elements in model portfolios—a trend that began after the 2008 financial crisis when investors sought yields above government bonds. The growing use of fixed-income ETFs for cash management underscores their versatility in modern portfolio construction. “There are high-quality, high-yield bonds available today, yielding 7% even at the short end,” says Noel Sheely, Head of ETF Specialists at AllianceBernstein.
The push & pull of fixed-income ETFs adoption
With more investors exploring the potential of fixed-income ETFs, new applications are emerging. For example, fixed-income ETFs are increasingly seen as an alternative for municipal bond investors looking at them from a tax-equivalent yield perspective. Private credit ETFs are also growing as a new category, and recent regulatory changes have prompted more insurance companies to integrate ETFs for portfolio allocations, especially for liquidity and interim investments. “The term ‘democratizing’ might be overused, but it truly applies here,” says Laipply, highlighting how data availability and technology are also supporting demand.
Despite their rising popularity, fixed-income ETFs still face certain barriers to adoption, particularly when compared to equity ETFs. This is especially true for niche products, such as high-yield bond ETFs, as many investors continue to favor more traditional, conservative approaches to fixed-income investing. Limited familiarity with these products, along with concerns over perceived complexity or risk, has slowed uptake.
Additionally, while equity ETFs are widely used for hedging and tactical adjustments, fixed-income ETFs remain underutilized in this capacity. Fixed-income ETFs also hold significant potential as tools for hedging interest rate risk, credit risk, and other factors, but these opportunities remain largely untapped.
A key debate surrounds the suitability of highly illiquid assets within ETF wrappers, given the potential for discount volatility and less stable pricing. “It’s hard to say whether investors are prepared for the inherent risks of trading thinly traded assets through ETFs, which might behave more like closed-end funds due to price mismatches with underlying assets,” says Laipply.
The bottom line: Changing investor needs will drive demand
As investor needs evolve, fixed-income ETFs are becoming indispensable in modern portfolios, particularly in model strategies blending core stability with tactical flexibility. Rising demand for customized, thematic products underscores a broader shift toward flexibility, liquidity, and adaptability.
Despite this momentum, barriers to adoption linger, especially among conservative investors, and fixed-income ETFs have yet to fully realize their potential in hedging and tactical roles. As the industry innovates to meet these needs, fixed-income ETFs are positioned to become integral tools for navigating today’s complex market landscape.