Advisors Shift From Mutual Funds to Sector ETFs

State Street Investment Management’s 2026 ETF Impact Report and Cerulli Associates data show financial advisors are moving client allocations from broad mutual funds into sector exchange-traded funds. Cerulli projects advisor ETF allocations will reach 25.8% by 2027, while mutual fund allocations are forecast to decline to 23.7%.

The State Street report cites accelerating ETF flows and a shift in corporate cash returns as the main drivers. Global ETFs took in $2 trillion in 2025, and the first quarter of 2026 attracted $641 billion, $211 billion above the previous first-quarter record, figures cited in the report show. State Street raised its long-term ETF assets forecast to $63.49 trillion by 2035, up from $54 trillion last year, saying flows are running roughly 18% ahead of the earlier trajectory.

The report links the allocation shift to changes in income from corporations. Companies have increased share repurchases while cutting dividend payouts, reducing a steady income source for some portfolios. Matthew Bartolini, global head of research strategists at State Street Investment Management, attributed advisor interest in sector funds to that decline in dividend reliability and the search for higher-yielding sectors.

Advisors are using sector ETFs to target specific outcomes such as income, inflation protection or exposure to structural growth themes. The report cites the State Street Utilities Select Sector SPDR ETF (XLU) as an example of a fund used to target dividend income. For growth exposure, the State Street Technology Select Sector SPDR ETF (XLK) is referenced for direct exposure to corporate spending on artificial intelligence infrastructure, what the report calls the “AI capital expenditure cycle.”

Michael Arone, chief investment strategist at State Street Investment Management, described a change in advisor priorities: “When ETFs first launched, the main question advisors asked was which benchmark to own or beat. Investors now ask what outcome they need, whether that is income, diversification, or a hedge against inflation.”

The report notes advisors increasingly use ETFs as building blocks to assemble concentrated industry positions or to rotate into defensive sectors and inflation hedges. State Street attributes its forecast revision to faster-than-expected inflows and a reallocation of client assets into ETF wrappers.