As exchange-traded funds continue to become a bigger part of the investing landscape, institutional investors are using the vehicles more broadly.
Over the past decade, many asset owners initially used ETFs for cash management, but they have realized that the funds’ inherent liquidity, transparency, diversification and low cost were well suited to transition management.
Institutional investors are now starting to look at these vehicles beyond short-term needs, as the industry has grown big enough to accommodate the large purchases asset owners need to make without disrupting the market.
According to State Street Investment Management, there are more than 9,500 ETFs available worldwide, with $13.8 trillion in assets under management—most of that in the U.S. Inflows into U.S. ETFs alone hit $1 trillion in 2025 year-to-date, with two months still remaining.
ETFs remain only a small part of institutional investors’ holdings, but that could change, as regulations have allowed more ETF strategies, and more asset managers are offering them. How much space ETFs occupy in asset owners’ toolboxes will depend on their needs, but their use is likely to grow.
Potential Long-Term Holdings
Preliminary data from Cerulli Associates’ 2025 asset owner survey showed that 27% of institutional asset owners were using exchange-traded funds as a core holding, with foundations and public defined benefit plans having the greatest uptake, says Jack Tamposi, an associate director in the institutional practice at Cerulli Associates.
“Generally, it’s an avenue through which they can allocate to a low-cost product, gain broad-market exposure and also enhance liquidity,” he says.
A 2024 S&P Dow Jones Indices analysis of U.S. and Canadian asset owners, using data from Form 13F filings, shows that over the past 10 years, asset owner ETF usage increased fourfold, with most of the implementation happening since the onset of COVID-19 in 2020 and the resulting financial crisis. Government pension funds were the biggest users, and 78% of the asset owners using ETFs were mostly invested in equities, with a preference for large-cap equity ETFs.
Tamposi says as asset owners increase their exposure to illiquid, private investments, they’re using ETFs to enhance liquidity on the public market side. Their liquidity needs became an issue in recent years because of a bad exit environment in private equity, along with external factors this year such as a new tax on endowments and a pullback of federal funding.
Rapid Growth
The move to ETFs may come at the expense of mutual funds, Tamposi says, as preliminary research from the organization suggests that asset owners are more likely to increase allocations to ETFs and decrease it from mutual funds.
David Mann, head of ETF product and capital markets at Franklin Templeton, says the last few years have not only seen a significant increase in the number of ETFs and the different investment strategies available, but also the number of ETFs with at least $1 billion in assets.
“From an institutional perspective, there’s just more options across anything you want to do,” he says, whether the investment is a core asset allocation or a tactical call. “Whatever that feels like, there’s probably an ETF that would provide that, often at scale.”
ETFs have long offered access to niche markets and passive indexes. A 2019 rule change by the Securities and Exchange Commission made it easier to access actively managed ETFs and other new strategies, such as single-stock ETFs and option-overlay ETFs, among others, Mann says.
Many of those are now hitting their five-year performance benchmarks, according to Mann, an important statistical milestone for many investors to gauge what might be a better fit for their portfolio, the traditional passive index ETF or a similar active strategy.
More traditional asset managers are also offering ETFs, whether as a new product or by converting a mutual fund to an ETF. The recent SEC ETF share class relief, granted in October to Dimensional Fund Advisors for 13 funds, is expected to permit asset managers to offer an ETF share class to an existing mutual fund, which may open the door to even further ETF adoption. For asset owners comfortable working with their existing managers, it offers them more choices, such as a separately managed account, mutual fund or ETF, Mann says.
Smaller Institutions Also Likely to Use ETFs
Erika Olson, director of public markets manager research at Meketa Investment Group, says her nontaxable asset-owner clients are asking more about ETFs, but their interest is still in the early stages. As of now, her very large public pension funds and other institutional clients have separately managed accounts for which they negotiate in advance tax-efficiency, cost, transparency and liquidity, thereby limiting the benefits of using ETFs.
“There are a smaller handful of cases where our clients are maybe looking for more shorter-term niche exposure to a sector within either equity or credit markets,” Olson says. “In that situation, an ETF may make sense.”
Will Forde, head of marketable equities at NEPC, agrees that ETFs offer niche exposure and tactical opportunities in a way that is hard to replicate with other vehicles. Factor-focused allocations and exposure to the mandates of a specific country, region or theme all lend themselves to long-term ETF usage.
ETFs can be easier operationally and cheaper to use than traditional index funds for NEPC’s smaller institutional clients, Forde says, since these smaller investors do not have the size and scale to negotiate favorable pricing.
Forde says his clients will use ETFs if they need to quickly implement tactical exposure, such as hedges. He also reports seeing them used for portfolio completion, such as if a client has a structural bias, like a country underweight. For taxable clients, ETFs are useful in tax-loss harvesting.
John Frank, head of ETF specialists at Invesco, says most asset owners who use their ETFs for long-term holdings are interested in index- and factor-based ETFs, noting that these users remain benchmark sensitive.
Both Frank and Mann say institutional investors are also looking at newer strategies. Frank says one large government pension plan took a recent distribution and ultimately has plans to invest the cash with a private credit manager. In the meantime, the investor has parked the money in Invesco’s bank loan ETF, which is correlated to private credit and can provide liquidity as the pension fund conducts due diligence on the manager.
Mann says Franklin Templeton is seeing interest in its digital asset strategies, such as allocations to bitcoin, which is available in an ETF.
“The knock-on effect of investors seeing more and more options within ETFs means now they want more and more options within ETF,” Mann says.
Forde sees use cases for ETFs evolving as asset owners continue to get comfortable with the vehicle.
“People get really creative with how to use things that even five or 10 years ago seemed pretty basic, but now they’re using them in different ways,” he says.