Active ETFs Play Increased Role in Institutional Portfolios

Exchange-traded funds—once a limited part of institutional portfolios—are a growing part of the tool kit for asset allocators.

A June 30 report from S&P Dow Jones and Crisil Coalition Greenwich noted that more than half of institutional investors in the U.S. and Canada are using ETF products, with adoption of ETFs more than doubling among this cohort in recent years.

“We’re seeing a clear increase in both institutional inquiries and ETF adoption. While the pace varies by institution, the direction is consistent across a broad range of asset owners,” says Anna Paglia, chief business officer at State Street Investment Management. “What is also evolving is how institutions use ETFs. Many may begin with familiar, highly liquid beta exposures and, as they gain experience with the structure, expand into more targeted, active and differentiated strategies.”

Brandon Clark, director of ETF business at Federated Hermes, says ETFs are popular in part because of their simplicity.

“Due to their ease of use, they can be bought like any stock listed on a U.S. exchange,” Clark says. “ETFs also allow institutional clients to minimize paperwork and operational setup; create a layer of daily liquidity to manage cash flow needs; and even provide additional liquidity on top of asset classes that have less liquidity.”

Replacing Passive, Active Strategies

Institutional investors are also utilizing ETFs to complement and/or replace both passive and active equity strategies.

While ETFs historically competed primarily with passive index funds, asset managers increasingly view the vehicle as a distribution channel for active investment strategies and have been offering more active ETF products. As a result, institutional investors can gain exposure to active management through a wrapper that retains many of the liquidity and transparency benefits associated with more traditional, passive ETFs.

Approximately 113 active ETFs were launched in August alone, according to data from J.P. Morgan Asset Management, accounting for 88% of all ETF launches during the month. Also in August, active ETFs had $55 billion in inflows, accounting for 36% of all ETF flows during the month.

“What’s interesting within that is: Not only are we seeing a structural shift toward ETFs because of the benefits that [they bring] to investors—trading throughout the day, transparent, typically lower price, tax efficient—but we’re now seeing increasingly active investments delivered through the ETF wrapper,” Bryon Lake, chief transformation officer at Goldman Sachs Asset Management, told reporters earlier this year.

Still, questions have been asked about the performance of many active ETFs relative to the benchmarks they track. According to data from Morningstar, only 38% of active ETF strategies  outperformed their benchmarks in 2025.

The Crisil Coalition Greenwich report noted that many institutional investors are questioning the effectiveness of active strategies during a market environment dominated by large-cap U.S. equities, in which it is harder to generate alpha.

“Seeing little opportunity for alpha generation in many increasingly commoditized public markets from their viewpoint, institutions are forgoing active strategies in favor of low-cost passive strategies that are designed to capture market beta and complementing these ‘core’ beta holdings with active ‘satellite’ allocations in asset classes with higher alpha potential,” the report stated.

ETFs in Institutional Portfolios

According to the Crisil Coalition Greenwich report, institutional investors are finding ETFs useful for  portfolio completion and liquidity management, along with manager transitions.

“Institutions are adopting ETFs in an effort to access what they view as important benefits,” the Crisil Coalition Greenwich report stated. “A key consideration is liquidity, which institutions cite as the top reason for using ETFs in both equities and fixed income. Institutions also value their ease of use and ability to provide quick access to exposures across asset classes. Additionally, institutions value ETFs’ low management fees and trading costs.”

The biggest uses for ETFs, according to the report, include strategic long-term allocations (identified by 42% of respondents), tactical and short-term exposure (40%), portfolio completion (35%), liquidity management (28%), transition management (21%), cash equitization (19%), international diversification (19%) and risk hedging (14%).

Still, ETFs make up a small portion of allocator portfolios. The report noted that 66% of allocators had less than 10% of their assets in ETFs, with another 25% allocating from 11% through 25%, %.

Allocators’ reasons for not adopting ETFs included: ETFs not being an approved vehicle within their organization (36% of respondents); being unaware of the benefits of using ETFs (19%); not helpful to achieving alpha (16%); and too costly (10%), according to the Crisil Coalition Greenwich report.

Despite increasing adoption, most institutions are unlikely to shift the majority of their assets into ETFs. Large public pension funds and endowments continue to rely heavily on private market investments, separately managed accounts and direct manager relationships for much of their portfolio exposure.

“Looking ahead, I expect continued innovation as more institutional capabilities and specialized strategies migrate into the ETF wrapper, making ETFs not just tools for market access, but increasingly the preferred vehicle for portfolio implementation,” says Max Guimond, head of North American solutions at Schroders.

John Kim, the CEO and co-founder of Reckoner Capital Management, says the convenience of, effectiveness of, and the variety of options available through ETFs continue to result in increased take-up.

“Low minimums, daily liquidity and ease of use are all drawing allocators to active ETFs,” Kim says. “SMAs and commingled funds often come with lock-up periods, higher fees, and extensive legal and operational due diligence. They can also require ramp-up periods that weigh on total returns. ETFs offer a more cost-effective, easy way to access the same types of strategies.”