Index funds reach 42% of average advisor portfolio, Fidelity says

Index funds now account for 42% of the average advisor portfolio, up from about 30% across the previous two years, according to Fidelity's Portfolio Insights report for the second quarter. Fidelity's Portfolio Construction team compiled the data from 2,498 portfolio reviews and quick checks conducted between April 1 and June 30, part of the roughly 12,000 reviews the firm powers each year.

ETFs are carrying the passive shift. Sixty-one percent of incoming portfolios held at least one ETF in the quarter, a share Fidelity says keeps growing every period. On average, 55% of an advisor's portfolio is in ETFs. Low-cost index ETFs appear in 56% of portfolios, and the cost picture is improving: average expense ratios fell to 43 basis points from an average of 50 basis points over the last few quarters.

Active ETFs are smaller but spreading. Fidelity's data shows 39% of incoming portfolios had active ETF allocations in the first quarter, with an average allocation of 26% in those accounts, up from 13% in 2022. New active products are being launched across the industry, and advisor appetite continues to grow.

Equity exposure stayed at 72% of the average portfolio, consistent with recent quarters. Within that sleeve, U.S. stocks took 79%, up two points from the prior quarter, and international took 21%. Large caps drew 65% of U.S. equity, mid caps 23%, and small caps 12%, close to the previous reading.

The numbers sit on top of a quarter that began with relief and ended with inflation. Markets bounced back after a shaky first quarter as geopolitical fears eased and oil prices fell from their peaks, while AI-related capital expenditures broadened earnings and a stronger labor market quieted recession talk. Then the Iran conflict intervened, bringing shipping disruptions, an energy-price spike, and rising consumer inflation. Shelter and service costs are showing signs of reacceleration, Fidelity says, adding tariff- and conflict-driven pressure to core goods. The report's own conclusion: markets are predisposed to bouts of volatility, and elevated asset valuations warrant continued emphasis on diversification.

The money has not fled to anything defensive; it has gone into the broadest, cheapest U.S. equity exposure. Index funds jumped twelve points, the equity sleeve keeps its 79% U.S. tilt, and ETF fees keep falling. For an RIA, that combination is a fee story: lower-cost holdings mean lower basis-point revenue on the managed book. Whether this quarter's 42% is a step or a spike is the question the next two quarters will answer.