When Capital Group recently added a muni exchange-traded fund to its tax-aware portfolio series and model portfolios, it was the result of the demand for actively managed fixed-income ETFs and the belief the integration would serve a wider array of advisors.
"I think where we saw the demand coming from [was] a lot of advisors who were transitioning their practices to be solely or predominantly ETF usage," said Scott Davis, head of ETFs at Capital Group. "You saw this probably emerging first in the [registered investment advisor] channel, but then really moving across channels."
Those advisors were building model portfolios they wanted to execute specifically through the ETF vehicle, he said.
Capital Group recently added its Capital Group Municipal High-Income ETF to its aware portfolio series and model portfolios, joining the firm's two other muni ETFs in model portfolios. All three muni ETFs can be part of a model or standalone.
The firm joins a small but growing number of shops that have added — or considered adding — muni ETFs to their model portfolios. This comes amid explosive ETF growth. Muni ownership of ETFs grew to $149.8 billion in the second quarter of 2025, up 5.3% quarter-over-quarter and 20.6% year-over-year.
"In their early days, ETFs were simple beta products, but over time ETFs matured into a sophisticated universe of diverse investment vehicles with highly specialized exposures," Jon Maier, a chief ETF strategist at J.P. Morgan, and Shannon Ahern, an ETF strategist at the firm, wrote in late May. "That expansion turned ETFs into attractive components for model portfolios, which historically were built with mutual funds."
However, "all those mutual fund models are going the way of the dodo, and you have more folks using now actively [or passively] managed ETFs, alongside third-party index ETFs," said Brett Sheely, vice president and head of ETF specialists at AllianceBernstein.
Overall, many firms have successfully integrated ETFs into their model portfolios, with active ETFs becoming a larger part in recent years, Maier and Ahern noted.
For munis, the model business will gravitate toward ETFs, but it will be a gradual transition, as mutual funds remain a very healthy and powerful investment tool, said Greg Hall, a managing director and head of U.S. global wealth management at PIMCO.
"Adoption of muni ETFs in model portfolios is increasing. While it's not a driving force nor reshaping the industry, on the margin, models are becoming more popular and then that should fuel increased interest in ETF models," Hall said.
PIMCO, for instance, began including MUNI, a muni ETF, in model portfolios five years ago. As an active, high-quality core municipal bond solution that works well in tax-aware solutions, MUNI is a strong fit in its model business, he said.
Part of the considerations to add muni ETFs to model portfolios comes from the popularity of fixed-income, with rates where they are, and the forward view on Federal Reserve actions, as market participants are pretty comfortable in the asset class, Hall said.
One of the benefits of ETFs is how easy they are to transact, which positions them well for model portfolios, he said.
"If you're moving around allocations for thousands and thousands of clients with maybe six or seven line-items apiece, being able to transact through the exchange and be dollar certain about pricing makes a big difference," Hall noted.
Products with muni ETFs, like a model portfolio, have existed for some time, AllianceBernstein's Sheely said.
There are firms that use muni ETFs as the fixed-income exposure designed for taxable accounts, he said.
Part of the reason those are popular is that models are not just for small accounts nor individual retirement accounts, but they can be used "upmarket" and by high-net-worth investors, Sheely said.
"ETFs are going to be a key building block in any model portfolio in the future," he said.
AllianceBernstein does not have muni ETFs in its model portfolios, but it could consider them for taxable investors, where muni exposure makes sense if there is interest, Sheely said.
However, the firm has 100% non-muni ETF models, which means incorporating some of its active ETFs into its models, he said.
"We did that because that's where the market's going. We looked at our model offering and said, 'What makes the most sense for investors? And having an all ETF model makes sense," Sheely said.
Currently, none of VanEck's model portfolios hold any muni ETFs — as the fixed income component is mainly USTs — the firm used to run a strategy that focused on municipal bonds, said Dylan Desai, a product manager at VanEck.
The problem, though, was the lack of interest, he said, so VanEck decided to implement fixed-income sleeves in a way that makes sense for its clients via its comprehensive asset allocation model, known as Wealth Builder.
The firm currently does not have plans to add munis back into its strategy, but that could change if there is enough interest from clients, Desai said.
Outside of munis, VanEck has several ETFs in its model portfolios, including Wealth Builder Core and Wealth Builder Plus, the latter includes Bitcoin and digital assets, he said.
"For clients who are tax-sensitive, the muni market right now is fantastic to access when it comes to generating income on a taxable equivalent basis. It's harder to find a better return profile than in the muni market," Hall said.
Kathie O'Donnell contributed to this report.
