ETFs featuring in model portfolio service (MPS) offerings saw only a slight increase year on year as longstanding issues with trading ETFs on UK platforms continue to bug the industry.
The latest Morningstar UK-managed portfolios landscape report revealed ETFs represented 15% of underlying holdings purely by number, a slight increase from 12% in 2023 and largely matching 15.4% in 2022.
Platforms have been identified as a key barrier to ETF adoption in Europe, with UK platforms not offering fractional trading or the full suite of ETFs for MPSs to access.
Model portfolios are therefore dominated by low-cost index funds, with just 15% of MPS not using passive mutual funds as their building blocks.
Cost pressures are also weighing on MPS providers, with portfolios labelled as ‘active’ falling from 61% to 48% since 2022.
“The growing number of passive and blended managed portfolios, and the increased use of index funds, reflects commercial pressure on costs,” Morningstar said.
One solution for the inclusion of ETFs in model portfolios has been the rise of fractional dealing.
Without it, wealth managers cannot rebalance MPSs efficiently as they are forced to buy and sell the full units of ETFs.
Despite this, the most popular ETF within UK-managed portfolios were ESG ETFs – a trend mirrored in 2023 - with the UBS ETF MSCI United Kingdom IMI Socially Responsible UCITS ETF (UKSR) featuring in 43 portfolios.
This was followed by the iShares MSCI USA SRI UCITS ETF (SUAS), appearing in 34 portfolios and the iShares MSCI EM SRI UCITS ETF (SUSM) featuring in 30.
The report also highlighted bond ETFs - including inflation-linked bonds and those targeting certain maturities – also feature in many managed portfolios.
Wealth manager Omba Advisory & Investments launched a model portfolio service (MPS) range using ETFs for financial advisers in June, a week after UK-based asset manager Omnis Investments launched a managed portfolio service (MPS) of four portfolios, each with a 30% allocation to ETFs.
