ETFs or mutual funds? Advisors are increasingly leaning in one direction, and the gap keeps growing wider. As ETF issuers continue cutting fees in the battle for investor flows, ETFs are becoming harder to ignore — particularly in long-term portfolios where even small cost differences can add up over time. What was once viewed as an alternative to mutual funds is now becoming the default wrapper for many advisors.

A recent survey by ISS Market Intelligence found that 60% of advisors now prefer ETFs when offered the same strategy across three wrappers: an ETF, mutual fund, or SMA. That's up from 53% in 2022. Over the same period, mutual fund preference fell in half, from 20% to 10%.

The trend is strongest among RIAs, where 80% selected ETFs as their preferred vehicle. But the more interesting story may be what's happening beneath the surface.

This is no longer just about fees or tax efficiency. The data suggests advisors are increasingly designing portfolios around ETFs as the default building block. According to AdvizorPro's latest RIA ETF Trends Report, RIAs are not just using more ETFs — they're building broader portfolios around them.

The average number of ETFs held per firm increased by 13.7%, rising from 77.7 to 88.3. More than 70% of firms expanded their ETF lineup over the period, while only 20.5% reduced exposure and 8.1% made no changes. The trend suggests RIAs are diversifying across a wider range of funds and strategies rather than consolidating into fewer positions.

There's also likely a generational component. Younger advisors entered the industry after ETFs had already become mainstream. Many have little attachment to the traditional mutual fund model and are more accustomed to constructing portfolios through modular exposures, model portfolios, and tax-aware customization.

Client expectations reinforce that shift. Investors increasingly expect transparency, flexibility, and lower friction — characteristics that align naturally with ETFs.

Interestingly, growth isn't going to the largest issuers. While the industry's largest ETF providers remain dominant, several saw fewer RIA firms using their funds over the past year. iShares allocator counts fell 7.7%, Vanguard declined 3.8%, and Invesco dropped 4.6%. At the same time, smaller and more specialized firms gained traction. Dimensional increased its RIA allocator base by 6.7%, JPMorgan rose 2.0%, and VanEck posted a modest 0.9% increase in market share.

For advisors, the takeaway is that ETFs are no longer simply replacing mutual funds — they're reshaping how portfolios are built. From creating broader, more diversified, and increasingly customized portfolios over time, the shift only continues to deepen.

Photo: Shutterstock