Active ETFs vs. mutual funds in modern model portfolios

As model portfolios become more central to many advisors’ practices, portfolio construction is no longer just about which strategies you use but how strategies are implemented. This article explores how active ETFs and mutual funds are being used together in practice and where each investment type fits within a modern model portfolio framework.

Model portfolios set the context for the active ETF vs. mutual fund debate

What is the difference between an actively managed mutual fund and an active exchange-traded fund (ETF)? At a structural level, active ETFs trade intraday on an exchange, offering real-time liquidity and greater transparency, while mutual funds are priced once a day and are typically used for longer-term allocations.

Both investment vehicles provide access to professional active management, but their structures may lend themselves to different uses within a portfolio. Active ETFs combine active decision-making with trading flexibility and transparency, and are sometimes used for tactical trading. Mutual funds, on the other hand, are often used for strategic allocations intended to remain stable over longer time horizons.

Model portfolios were not designed to rely on a single underlying investment vehicle, such as an ETF, mutual fund, interval fund or separately managed account (SMA). Their role is to provide a disciplined, repeatable framework for managing allocations across client portfolios at scale. As models play a larger role in investment programs for individuals across the wealth spectrum, the focus naturally shifts toward how each vehicle supports a specific role within the model.

“While market trends are shifting toward ETFs and away from mutual funds, some active strategies with impressive long-term track records are only available in the mutual fund–vehicle type. It’s important for model portfolios to maintain access to these strategies, and a hybrid model portfolio structure allows for that,” says Brian Hess, portfolio manager, Natixis Investment Managers.

Why active ETFs are gaining traction in model portfolios

Actively managed ETFs can offer numerous benefits, including the comfort of professional money management, tax efficiency, cost-conscious pricing, flexibility, diversification and transparency. Unlike unmanaged passive ETFs, which track an index, active ETFs may offer the potential for enhanced risk-adjusted returns through skilled portfolio management.

What’s driving ETF adoption among advisors and RIAs

Industry data shows that firms overwhelmingly rely on both vehicles, with 94% incorporating mutual funds and ETFs, and 81% using blended strategies that combine the two to support diversification and implementation flexibility.¹

Your own experience may also shape how you approach the active ETF vs. mutual fund question. Many registered investment advisors (RIAs), particularly those who entered the industry more recently, built their practices during the rapid growth of ETFs. For them, ETFs are not an alternative structure but a familiar default. This familiarity extends from passive ETFs, which simply track an index, to active ETFs that reflect a greater level of portfolio manager decision-making as well as hybrid examples like “smart beta” products that build portfolios around factors like momentum, profitability, or style classifications, such as value or growth.

Technology has reinforced this general preference for ETF structures. Modern portfolio management systems, proposal tools, and trading platforms are often optimized for ETF‑based workflows. Active ETFs fit naturally into these environments, allowing model portfolio managers to access active management within a structure that aligns with existing processes and client experience.

Importantly, greater ETF usage reflects comfort with the vehicle itself, not a rejection of mutual funds or active management.

Why mutual funds still matter in model portfolios

Despite the growing use of active ETFs, mutual funds continue to play a meaningful role in many model portfolios, particularly within the strategic core. Many active strategies are designed with longer investment horizons, lower turnover, and research‑driven processes that align well with the mutual fund structure.

Mutual funds are often well suited for allocations intended to remain stable through full market cycles, where daily trading flexibility is less important. In these cases, the structure supports disciplined long‑term positioning rather than frequent adjustment.

As a result, mutual funds are not disappearing from models. Instead, they continue to be used where their characteristics best support the portfolio’s objective.

How to blend active ETFs and mutual funds in practice

In practice, model portfolio managers are not making an all‑or‑nothing decision between active ETFs and mutual funds. Instead, many model providers design portfolios that intentionally combine both structures, using each where it best supports the portfolio’s role, time horizon and implementation needs.

A common approach is to anchor the model with actively managed mutual funds in the strategic core, where allocations are expected to remain stable over longer periods. These positions are typically selected based on manager conviction, fundamental research, and a full market‑cycle investment view. Because they are not intended to be traded frequently, the daily‑priced mutual fund structure fits naturally in this role. It is important to note some active ETFs are suitable to consider for the strategic core as well, since they take on many of the characteristics that traditional mutual funds do.

This approach aligns with broader industry practice, where some firms construct blended models that combine mutual funds and ETFs, using each structure where it best supports diversification and portfolio objectives.¹

Around that strategic core, ETFs, both active and passive, are often used to introduce flexibility. Active ETFs may support tactical tilts, portfolio transitions, or allocations where intraday trading and operational efficiency add value. This structure allows portfolio managers to make adjustments without disrupting the long‑term foundation of the model.

How Natixis Investment Managers manages models

This blended approach is how Natixis model portfolios are constructed in practice. “Our models pair a strategic core typically of actively managed mutual funds with a tactical ETF‑based overlay designed to support flexibility, implementation, and portfolio adjustments over shorter time horizons,” says Hess.

For financial advisors managing models across a broad client base, this blend can also improve execution. ETFs integrate seamlessly with rebalancing tools used to implement changes at scale, helping simplify portfolio updates across accounts.

This hybrid approach does not reduce the role of active management. Instead, it reflects a more targeted application of it. Model portfolios may rely on mutual funds where outcomes are driven by long‑term stock selection and discipline, while using ETFs where flexibility, transparency, or responsiveness is most helpful.

What the active ETF vs. mutual fund shift means for portfolios

The growing use of ETFs in model portfolios reflects how advice delivery continues to evolve. Mutual funds and ETFs are widely used together across models, with blended approaches now a common implementation framework.

At the same time, mutual funds remain central to long‑term portfolio construction, especially where active management is core to the investment approach. The future of model design is less about choosing one structure over another and more about understanding how different wrappers can work together.

The active ETF vs. mutual fund conversation ultimately comes down to flexibility. It is about using the right structure for the right role in support of client goals and efficient portfolio and practice management. In addition, the more active use of ETFs within models may produce a more tax-efficient experience for those owning our models.