Financial advisors will soon — and for the first time — hold more of their clients’ assets in exchange-traded funds than in mutual funds, according to a new report by Cerulli Associates.

Nearly all advisors use mutual funds and ETFs — about 94% and 90% of them, respectively, Cerulli said in a report issued Friday.

However, advisors estimate that a larger share of client assets (25.4%) will be invested in ETFs in 2026 relative to the share of client assets in mutual funds (24%), according to Cerulli.

If that happens, ETFs would be the “most heavily allocated product vehicle for wealth managers,” beating out individual stocks and bonds, cash accounts, annuities and other types of investments, according to Cerulli.

Currently, mutual funds account for 28.7% of client assets and ETFs, 21.6%, it said.

ETFs and mutual funds are similar. They’re essentially a legal structure that allows investors to diversify their assets across many different securities like stocks and bonds.

But there are key differences that have made ETFs increasingly popular with investors and financial advisors.

ETFs hold roughly $10 trillion of U.S. assets. While that’s about half the roughly $20 trillion in mutual funds, ETFs have steadily eroded mutual funds’ market share since debuting in the early 1990s.

“ETFs have been attractive for investors for a long time,” said Jared Woodard, an investment and ETF strategist at Bank of America Securities. “There are tax advantages, the expenses are a bit lower and people like the liquidity and transparency.”

ETF investors can often sidestep certain tax bills incurred annually by many mutual fund investors.

Specifically, mutual fund managers generate capital gains within the fund when they buy and sell securities. That tax obligation then gets passed along each year to all the fund shareholders.

However, the ETF structure lets most managers trade stocks and bonds without creating a taxable event.

In 2023, 4% of ETFs had capital gains distributions, versus 65% of mutual funds, said Bryan Armour, director of passive strategies research for North America at Morningstar and editor of its ETFInvestor newsletter

“If you’re not paying taxes today, that amount of money is compounding” for the investor, Armour said.

Of course, ETF and mutual fund investors are both subject to capital gains taxes on investment profits when they eventually sell their holding.

Liquidity, transparency and low fees are among the top reasons advisors are opting for ETFs over mutual funds, Cerulli said.

Index ETFs have a 0.44% average expense ratio, half the 0.88% annual fee for index mutual funds, according to Morningstar data. Active ETFs carry a 0.63% average fee, versus 1.02% for actively managed mutual funds, Morningstar data show.

Lower fees and tax efficiency amount to lower overall costs for investors, Armour said.

For one, mutual funds are unlikely to cede their dominance in workplace retirement plans like 401(k) plans, at least any time soon, Armour said. ETFs generally don’t give investors a leg up in retirement accounts since 401(k)s, individual retirement accounts and other accounts are already tax-advantaged.

Additionally, ETFs, unlike mutual funds, are unable to close to new investors, Armour said. This may put investors at a disadvantage in ETFs with niche, concentrated investment strategies, he said. Money managers may not be able to execute the strategy well as the ETF gets more investors, depending on the fund, he said.

The Dow Jones Industrial Average has been declining for nine straight days, heading for its longest losing streak since February 1978. What is going on and how concerned should investors be?

First off, let’s explain which stocks are driving the losses.

The biggest laggard in the 30-stock Dow during this losing streak has been UnitedHealth, which has contributed to more than half of the decline in the price-weighted average over the past eight sessions. The insurer has plunged 20% this month alone amid a broad sell-off in pharmacy benefit managers after President-elect Donald Trump’s vow to “knock out” drug-industry middlemen. UnitedHealth is also going through a tumultuous period with the fatal shooting of Brian Thompson, the CEO of its insurance unit.

And then there’s a rotation going on with investors selling out of the cyclical names in the Dow that initially popped on Trump’s reelection. Sherwin-Williams, Caterpillar and Goldman Sachs, all stocks that typically gain when the economy is revving up, are each down at least 5% in December, dragging down the Dow significantly. These names all had a big November as they were seen as beneficiaries of Trump’s deregulatory and pro-economy policies.

The Dow, largely comprised of blue-chip consumer discretionary and industrial names, is widely viewed as a proxy for overall economic conditions. The extended sell-off did coincide with renewed concerns about a weaker economy in light of a small jump in jobless claims data last week. However, investors still remain quite optimistic about the economy for 2025 and see nothing on the horizon like the stagflationary period of the late 1970s.

Most investors are shrugging it off

There are many reasons to believe the Dow’s historic losing streak is not a source for major concern and just a quirk of the price-weighted metric that’s more than a century old.

First and foremost, the Dow anomaly comes at a time when the broader market is still thriving. The S&P 500 hit a new high on Dec. 6 and sits less than 1% from that level. The tech-heavy Nasdaq Composite just reached a record on Monday.

Meanwhile, while the length of Dow’s sell-off is alarming, the magnitude is not the case. As of Tuesday midday, the average is only down about 1,582 points, or 3.5% from the closing level on Dec. 4, when it first closed above the 45,000 threshold. Technically, a sell-off of 10% or greater would qualify as a “correction” and we are far from that.

The Dow was first created in the 1890s to model a regular investor’s portfolio — a simple average of the prices of all constituents. But it could be an outdated method nowadays given its lack of diversification and concentration in just 30 stocks.

“The DJIA hasn’t reflected its original intent in decades. It is not really a reflection of industrial America,” said Mitchell Goldberg, President of ClientFirst Strategies. “Its losing streak is more of a reflection of how investors are gorging themselves on tech stocks.”

The Dow price-weighted nature means that it’s not capturing the massive gains from megacap stocks as well as the S&P 500 or the Nasdaq. Although Amazon, Microsoft and Apple are in the index and are all up at least by 9% this month, it’s not enough to pull the Dow out of the funk.

Many traders believe the retreat is temporary and this week’s Federal Reserve decision could be a catalyst for a rebound especially given the oversold conditions.

“This pullback will be the pause that refreshes before a reversal higher to close 2024,” said Larry Tentarelli, chief technical strategist and founder of the Blue Chip Daily Trend Report. “We expect buyers to come in this week … Index internals are showing oversold readings.”

— CNBC’s Michelle Fox, Fred Imbert and Alex Harring contributed reporting.