Why Advisors Are Ditching Mutual Funds for Sector ETFs

Record ETF inflows are pointing to a change in how financial advisors are building portfolios, according to State Street Investment Management’s 2026 ETF Impact Report.

Key Takeaways:

• Advisor ETF allocations are on track to surpass mutual fund allocations for the first time by 2027.
• Corporate share buybacks have replaced dividends, pushing advisors toward sector funds for income.
• Global ETF inflows hit $2 trillion in 2025 and are already running ahead of long-term forecasts.

Advisors are moving away from broad mutual funds and turning to targeted sector funds instead. Those funds help hit specific goals, from bringing in reliable income to protecting against inflation. Advisor ETF allocations are projected to climb to 25.8% by 2027, overtaking mutual fund allocations expected to fall to 23.7%, according to Cerulli Associates data cited in the report.

When ETFs first launched, the main question advisors asked was which benchmark to own or beat. That framing has largely given way to something else, according to Michael Arone, chief investment strategist at State Street Investment Management. Investors now ask what outcome they need, whether that is income, diversification, or a hedge against inflation.

Behind that shift is a straightforward income problem. Matthew Bartolini, global head of research strategists at State Street Investment Management, said corporations have moved away from paying dividends. Instead, they have shifted toward buying back their own shares, cutting off a steady income source investors once relied on.

Inside the Sector Shift

Utilities have emerged as one answer to that problem. The State Street Utilities Select Sector SPDR ETF (XLU), holds U.S. utility companies and targets the kind of dividend income broad market indexes have become less reliable at delivering. That is largely because those indexes are increasingly weighted toward companies that return cash through buybacks rather than dividends.

See more: VIDEO: ETF of the Week: XLU

For advisors chasing structural growth themes, the State Street Technology Select Sector SPDR ETF (XLK) offers direct exposure to what Arone called the “AI capital expenditure cycle” in the report, meaning the wave of corporate spending on artificial intelligence infrastructure.

Those trends are unfolding against a backdrop of accelerating inflows. ETFs globally took in $2 trillion in 2025, according to Morningstar data cited in the report. Then the first quarter of 2026 brought in another $641 billion, which was $211 billion above the prior first-quarter record.

State Street Investment Management has revised its global ETF forecast upward, now projecting $63.49 trillion in assets by 2035, according to the report. That is up from last year’s estimate of $54 trillion, as flows are already running 18% ahead of the original trajectory.

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