Portfolio Construction

Know what risks you own

6 key trends from our 2025 Advisor Portfolio Insights Report

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Mark Barile Jan Gundersen

June 6, 2025

Many advisors are assessing portfolio risks and convictions after a volatile start to the year, ongoing tariff discussions and uncertainty about where markets and the economy may be headed. Markets have seen significant swings this year so far, with the S&P 500 Index shedding almost 5% and the MSCI All Country World Index (ACWI) ex USA index up 9% as of April 30 before U.S. equities showed signs of a rebound in May. How are U.S. advisors positioning portfolios in this environment, with the potential for more volatility ahead?

 

Our analysis of nearly 1,400 actual advisor portfolios from January 1, 2025 through March 31, 2025 shows that portfolios may be more volatile than many advisors think. In fact, average advisor portfolio exposure to high volatility equity has risen steadily in advisor portfolios following peak levels of equity market concentration about a year ago. Here are six key trends we’ve observed related to portfolio volatility and what might be driving it.

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  1. High volatility equity
  2. Small & mid-cap equity
  3. Passive allocations
  4. Dividends
  5. U.S. vs Non-U.S. equity
  6. Income

1. Does your portfolio have too much exposure to high volatility equity?

 

“This broader trend of rising exposure to high volatility funds in the average advisor portfolio — defined as a standard deviation of at least 10% higher than the S&P 500 — has been on our team’s radar for a while,” Senior Investment Director Jan Gundersen says. “Though it may not be true for every advisor,” Gundersen says, “it’s a topic we tend to raise in consultations and explore further when we see it in specific portfolios.”

 

A natural rise in market concentration and volatility in sectors such as information technology is one factor leading to that increase over the last year and especially through the market volatility seen in the first quarter. But what else has been driving higher volatility in advisor portfolios? “Unintended small and mid-cap exposure appears to be a key factor,” says Mark Barile, manager of the Capital Group Portfolio Consulting and Analytics team.

“This broader trend of rising exposure to high volatility funds has been on our team’s radar for a while. Though it may not be true for every advisor, it’s a topic we tend to raise in consultations … when we see it.”

— Jan Gundersen, senior investment director

Chart showing that exposure to high volatility equity funds has risen steadily in advisor portfolios from a year ago. Average advisor exposure to high volatility (defined as a standard deviation of at least 10% higher than the S&P 500) has risen from 22% as of March 31, 2024 to 29% as of September 30, 2024 to 35% as of March 31, 2025. As of March 31, 2025, exposure to high volatility funds in the American Funds® Moderate Growth and Income Model Portfolio was 14% by comparison.

Sources: FactSet, Morningstar.

1High volatility statistics for the average advisor portfolio as of 3/31/25 are based on aggregate exposures of 1,394 advisor portfolios analyzed by Capital Group’s Portfolio Consulting and Analytics team from 1/1/25 through 3/31/25. High volatility exposure as of 9/30/24 is based on aggregate exposures of 1,397 advisor portfolios analyzed by the team, while the 3/31/24 exposure is the aggregate exposure of 1,402 advisor portfolios.

2The asset allocation of the American Funds® Moderate Growth and Income Model Portfolio, as of 3/31/25, was 67% equity and 33% fixed income, cash and other, which broadly aligns with allocations of the average advisor portfolio.

2. Do you have hidden small and mid-cap exposure?

 

“Many advisors aren’t aware of how much small and mid-cap exposure they have in portfolios and how that could be contributing to higher volatility,” says Barile. “The issue stems from intentional exposures plus unintended tilts via a combination of large-cap manager drift, overlapping passive index exposures, and niche exposures like sector and factor tilts,” he adds. “When combined they tend to add up and surprise advisors.” Small-cap allocations made up 11% of the average advisor portfolio as of March 31, 2025 compared with only 4% for the American Funds® Moderate Growth and Income Model Portfolio.

“Many advisors aren’t aware of how much small and mid-cap exposure they have in portfolios and how that could be contributing to higher volatility.” 

— Mark Barile, manager of the Capital Group Portfolio Consulting and Analytics team

3. Are your passive allocations causing unintended risks?

 

Passive allocations in the average advisor portfolio are nearing their highest levels since the team started doing consultations in early 2021, according to Barile. The current passive allocation for the average advisor portfolio stands at 34%, as of March 31, 2025, with the highest point at 35% in March 2024 and the lowest at 21% in June 2021.

 

Overall, broader industry flows have shown continued interest in blend strategies as advisors appeared to assess risks in a volatile quarter. In fact, flows into large blend and mid-cap blend were the only positive U.S. equity category flows for the quarter ended March 31, 2025. “We have seen continued flows into blend strategies over the last year,” Gundersen says. “While advisors may be turning to passive blend strategies in an effort to de-risk portfolios, it could end up increasing risk in advisor portfolios in unexpected ways depending on the composition of those strategies.”  

“While advisors may be turning to passive blend strategies in an effort to de-risk portfolios, it could end up increasing risk in advisor portfolios in unexpected ways.”

— Jan Gundersen

Passive allocations near highest level since early 2021 

 

Percentage of average advisor portfolio in passive strategies versus active

Bar charts showing that passive allocations in the average advisor portfolio have nearly reached their highest levels since early 2021, ending at 34% as of March 31, 2025. Since early 2021, the highest allocation to passive allocations was at 35% in March 2024 whereas the lowest was at 21% in June 2021.

Sources: FactSet, Morningstar. Passive allocation statistics for the average advisor portfolio as of 3/31/2025 are based on aggregate exposures of 1,394 advisor portfolios analyzed by Capital Group’s Portfolio Consulting and Analytics team from 1/1/2025 through 3/31/2025. The 35% passive allocation in March 2024 — the highest since a starting point of March 2021 — is based on the aggregate exposure of 1,402 advisor portfolios analyzed by the team, while the passive exposure of 21% in June 2021 — the lowest since March 2021 — is based on 542 advisor portfolios.

Explore how average advisor passive allocations have changed in recent years

Only 2 positive Morningstar

U.S. equity flows in Q1

(in $ millions)

 

Large blend

$49,678

Mid-cap blend

$5,640

 

Source: Morningstar. As of 3/31/2025.

Data include open-end mutual funds and ETFs.

4. Does your portfolio have enough dividend exposure to mitigate volatility?

 

It’s no surprise to many advisors that dividend payers tend to dampen volatility. But at the same time, the average advisor portfolio has significant allocations to low and non-dividend payers. “A key theme we’ve consistently seen for some time now is that advisor portfolios tend to have much higher allocations to low and non-dividend payers than our American Funds model,” Barile says. As of March 31, 2025, the average advisor portfolio had a 39% exposure to low and non-dividend payers compared with the 27% for the American Funds® Moderate Growth and Income Model Portfolio. 

 

“Not having enough dividend payers may be another factor driving up higher volatility in many advisor portfolios, especially those built for growth-and-income and retirement income,” adds Gundersen. The team’s analysis shows very little change in advisor portfolios as they move from growth objectives to more conservative goals over time. “Most advisor portfolios aren’t differentiating dividend exposure by goal,” Gunderson says. “This is a stark contrast to the approach we take in American Funds model portfolios which dramatically increase dividend exposure in growth-and-income and income portfolios.” 

“Not having enough dividend payers is another factor driving up higher volatility in many advisor portfolios, especially those built for growth-and-income and retirement income.”

— Jan Gundersen

Source: Capital Group. The Capital Group Portfolio Consulting and Analytics team analyzed 1,394 portfolios in consultation with financial professionals from January 1, 2025 to March 31, 2025. During these consultations, portfolio objectives were discussed and aligned to the American Funds model portfolio objectives. The American Funds model portfolios include a suite of models with objectives ranging from growth and growth & income to income and preservation.

5. What’s the right balance of U.S. vs. non-U.S. equity exposure for your portfolio goals?

 

As it happens, international equities tend to offer a wide range of dividend opportunities. Dividend payers make up a higher percentage of non-U.S. equity indexes such as the MSCI ACWI ex USA Index and MSCI EM Indexes than U.S. ones including the S&P 500 Index. 

 

But even as international indexes fared significantly better than U.S. markets in the first quarter and are far less concentrated than the U.S. market*, many advisors continued to shy away from international stocks through the early part of 2025. Morningstar industry flows to international equity were negative for the quarter ended March 31, 2025, led by flows out of foreign large growth stocks.

 

“We saw non-U.S. equity allocations reach their lowest all-time point as of March 31, 2025, from when the team first started doing consultations in early 2021,” says Barile. “The tide has changed very quickly and current trade discussions have yielded significant advisor interest in diversifying portfolios with actively managed global equity in recent weeks,” Barile adds. 

 

“We also encourage advisors to take a look under the hood of their international equity allocations,” Gundersen adds. That includes evaluating exposures both by country of domiciles as well as sources of revenue.

 

* Based on the % of market capitalization of top 10 stocks in the S&P 500 versus MSCI EAFE.

“We saw non-U.S. equity allocations reach their lowest all-time point as of March 31, 2025 from when the team first started doing consultations in early 2021. The tide has changed very quickly and current trade discussions have yielded significant advisor interest in diversifying portfolios with actively managed global equity.”

— Mark Barile

Lowest non-U.S. equity allocations since early 2021

 

Percentage of average advisor portfolio in non-U.S. equities vs. U.S. equity based on Morningstar allocations categories

Bar charts showing that non-U.S. equity allocations in the average advisor portfolio have reached their lowest levels since early 2021, dropping to 20% as of March 31, 2025. Since early 2021, the highest allocation to passive allocations was at 27% in March 2021.

Sources: FactSet, Morningstar. The non-U.S. equity vs. U.S. equity allocations shown here reflect broad Morningstar allocation categories. The 20% non-U.S. allocation from 3/31/25 — the lowest since March 2021 — is based on the team’s analysis of 1,394 advisor portfolios, while the 27% highest non-U.S. allocation as of 3/31/21 is based on 546 portfolios.

Explore how average advisor international allocations have changed in recent years

Largest Morningstar 

non-US. equity outflow 

in Q1
 (in $ millions) 

 


Large foreign growth

-$11,487

 

Source: Morningstar. As of 3/31/25. 

Data include open-end mutual funds and ETFs.

6. Do you have enough core bond exposure to counter equity volatility?

 

In the first quarter, bond markets appeared to resume their traditional role of holding up better than stocks through periods of significant volatility. At the same time, it appears that some advisors have been waiting to see what happens before shoring up core bond positions, according to our team. 

 

Morningstar trends showed that flows into ultrashort bonds were the second largest flows across all categories in the first quarter including equity. (The only larger flow was into the large blend category.) “We are finding that many advisors are weighing the potential for higher inflation and increased policy uncertainty under the new administration, as well as a reluctance to take on possible interest rate risk,” says Barile.

“Heavy flows into covered call strategies may be causing unintended risks. We recognize that every situation is unique and encourage advisors to talk with us.”

—Jan Gundersen

Similarly, flows to derivative income were the third largest flow across all categories. Derivative income strategies use options to generate income beyond sources such as dividends and often involve covered calls to collect premiums. “The noticeable flows to derivative income this quarter reinforces our observation that many advisors are feeling cautious. But at the same time, heavy flows into covered call strategies may be causing unintended risks,” Gundersen says. “The level of risk depends on the specific advisor and their portfolios and goals. We recognize that every situation is unique and encourage advisors to talk with us.”

2025 Advisor Portfolio Insights

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