Institutions’ use of exchange-traded funds is evolving. No longer simply a means of providing tax-optimized passive exposure, ETFs are gaining ground as key parts of portfolio management for allocators.
According to a recent survey conducted by Invesco and Cambridge Associates, defined benefit plans have allocated approximately $133.6 billion to ETFs as of year-end 2025, making DB plans the lead investors in ETFs across all types of asset owners. Data from the survey show that defined benefit plans are using ETFs for liquidity management, manager transitions, tactical bets and, more recently, strategic long-term positions.
Survey respondents said that use cases for ETFs have grown in portfolios largely because they are easy to use and cost less than many other solutions. As the types of strategies available through ETFs have expanded, institutions have also found it cheaper to get exposure to certain active strategies in an ETF wrapper, rather than sticking with external managers.
Focus on Portfolio Operations
Asset owners now use ETFs largely the same way their external managers already were. At the operational level, using ETFs as part of transition management work is already employed by most large asset managers.
Paisley Nardini, head of investment strategy at Tema ETFs, says ETFs can be beneficial for transition management within asset classes.
“Finding ETFs that deliver a similar level of beta to private equity/credit are primary use cases,” she says. “The Russell 2000 is often the low-cost, liquid alternative for cash management alongside private equity allocations, for example. High-yield credit or bank-loan ETFs can be a solution for transition management in private credit.”
Using ETFs this way has been a longstanding practice for institutions, and sources say the approach is getting more sophisticated as more asset classes and strategies are offered in an ETF wrapper.
“There is more customization available than we’ve ever had in ETFs right now,” says Brian O’Donnell, co-founder of ETF issuer BondBloxx. “We are also seeing ETFs used more tactically. Hedge funds have commonly done this, where you can use ETFs to take a short-term view without adding a lot of cost to the trade. Now institutions are doing similar things. They can be used for long/short pair trades, for example, without having to go through an external manager.”
Effectively Cutting Costs
O’Donnell notes that the level of precision inside ETFs has increased considerably since the first equity ETFs launched in 1993, which means investors can now access a wider variety of strategies within the wrapper.
“We were the first to put a basket of CCC[-rated] bonds into an ETF, for example, and institutions are realizing that they can access something like that, which would otherwise be expensive, in an efficient vehicle,” O’Donell says.
Other strategies, such as managed futures. are also available in ETFs and have attracted billions of investment dollars, in part because of their lower cost. Managed futures strategies, for example, provide diversification but tend to perform best during times of market stress. The investments can be expensive to invest in because of the negative carry generated during slow periods. Putting the strategy in an ETF lowers the cost during those times by removing traditional management fees.
This does not necessarily mean it is full steam ahead for an all-ETF portfolio, however. Andrew Beer, co-founder and managing member of Dynamic Beta Investments, which offers a managed futures ETF, says there is still significant vehicle bias within institutional investing. This means that in some cases, an institutional investor is willing to shoulder higher costs because they have existing frameworks and external manager relationships.
“Target allocations are what they are, and there’s an expectation around how those are made,” Beer says. “You can provide the track records and talk about costs, and ETFs are going to continue to eat up portions of market share, but investors still find value in their external manager relationships.”
Meb Faber, co-founder and CIO of Cambria Investments, has argued in several papers that if institutions are not investors in the top quartile of private market funds, they should move more—if not all—of their portfolios to ETFs because of the potential cost savings. But he adds that institutional investors’ preferences largely remain focused on using ETFs for efforts like cash management or tactical trades.
“Investors see the returns from something like an investment in SpaceX where everyone is making a zillion dollars, and think they’re going to be the ones that do that, but it’s really a pretty small group,” Faber says. “If you’re not in that group and you’re staring down higher costs and higher complexity, there’s going to come a point where you ask if the juice is worth the squeeze.”
Tags: ETFs, Liquidity, Portfolio Construction