Sixty-seven per cent of institutional investors now use ETFs 'extensively and very frequently,' notes strategist at Global X
While exchange-traded funds (ETFs) have often been dismissed in the institutional space as tools for retail investors, that perception has now notably flipped, according to several ETF experts.
Raghav Mehta, for one, sees a clear evolution in how ETFs are perceived by the institutional investment community.
Once regarded as tools primarily for retail investors, ETFs have steadily moved into the mainstream of pension and institutional strategies. He explained that ETFs were initially built with “the end investor, the retail traders and… the mom-and-pop investors in mind,” but over time, they’ve become increasingly appealing to more sophisticated users.
“ETFs are now increasingly being seen and utilized by pension funds, institutional allocators and institutional investors as a mainstream solution, as a core constituent portfolio holding within their institutional strategies for pension funds. What used to be considered the new kid on the block has now become a core component used by institutional investors… not even satellite pieces,” explained Mehta, vice president and ETF strategist at Global X.
He noted that ETFs are increasingly being used by institutional players and pension funds for long-term exposures to equities, fixed income and even certain commodities especially, for gaining quick, easy and targeted access to certain sectors, regions.
Meanwhile, Bobby Eng, vice-president and head of platform and institutional ETF distribution at Franklin Templeton, agrees to an extent.
“ETFs haven’t really been part of the arsenal for institutional investors for decades,” he said. “They’re just another investment tool that they can use… to achieve a certain goal.”
Mehta pointed to data from a 2024 State Street Global Advisors survey that found 67 per cent of institutional investors now use ETFs “extensively and very frequently”, up from just 15–20 per cent in the early days. Among those leading this shift? Canadian pension funds.
“Canadian institutions lead that institutional usage of ETFs globally,” he said, noting that they allocate an average of 18.8 per cent of their total assets to ETFs, according to a survey from Investment Executive.
And that trend appears to be accelerating as “a net of 37 per cent of institutions plan to increase ETFs in their portfolios in the next two years,” he highlighted, pointing to data released from the Financial Times.
Cost and liquidity are the main factors driving this adoption as Mehta emphasized that institutional decision-makers are motivated by efficiency.
“The lowest costing ETFs are the main driver,” he said.
Consequently, the appeal for institutions is partly structural as ETFs offer immediacy, Eng explained as using an ETF fund manager can take several weeks if not, months.
“With exchange traded funds, If they agree that’s the vehicle to use, they could trade it that day,” Eng said.
ETFs are being utilized in more deliberate and multi-functional ways among institutional investors, evolving from short-term tactical instruments into essential components of portfolio construction. Eng explained that while many of the strategies employed by institutions overlap with those used by retail investors and advisors, the applications are becoming more advanced and purposeful.
Daniel Stanley, managing director, head of institutional sales and service at BMO GAM, highlighted two recent developments that have significantly advanced the credibility and adoption of ETFs among institutional investors.
The first key moment came in July 2020, when the Bank of Canada published a report titled “Will ETFs Shape the Future of Bond Dealing?” The report identified four core advantages of ETFs for fixed income markets: improved efficiency in bond distribution, reduced market segmentation, better price discovery, and lower transaction costs on portfolio trades.
The second development, according to Stanley, was this past January, when OSFI (Office of the Superintendent of Financial Institutions) updated the Life Insurance Capital Adequacy Test (LICAT). The change now treats fixed income ETFs on par with cash bonds in terms of capital charges for life insurer, removing a long-standing disadvantage and significantly leveling the playing field.
Together, he emphasized these two events mark a shift in how ETFs are viewed in institutional circles.
“I look at those two as a sequence of events in a trend of acknowledgements that these are really powerful tools for institutional investors,” he said.
However, he cautions institutional investors to view ETFs not as replacements, but as complementary tools that enhance what they already use, whether that’s bonds, derivatives, SMAs, or pooled strategies.
“The bond ETF really does a fantastic job providing that additional layer of liquidity,” he said. “There’s tremendous value in that.”
Rather than hiring analysts to navigate fragmented or illiquid markets, like frontier regions within emerging markets, funds are opting for ETF-based beta exposure, Mehta noted.
“Instead of chasing alpha by hiring an analyst do that stock picking and stock selection when it's just not in their wheelhouse, or they find it more expensive to do so, they’re okay with adding beta,” he said.
Liquidity is another major reason institutions turn to ETFs as Eng noted ETFs often function as a “liquidity sleeve,” making up anywhere from 3 per cent to 10 per cent of a portfolio. These sleeves are designed to be quickly bought or sold depending on market needs or inflows and outflows, and in some cases are held indefinitely for the express purpose of managing liquidity.
“They could use the proceeds from that ETF in order to deploy assets into a particular name,” he added.
Both also pointed to the role ETFs play in managing volatility.
“These are perfect times that ETFs tend to shine,” Eng said. “In times of volatility, in times of stress… they’re very liquid vehicles in order to gain exposure to rebalance as opposed to individual securities.”
Mehta agrees, noting that ETFs have become vital among institutions for “diversification benefits and liquidity management,” particularly when institutional desks want to balance short positions with cost-efficient long exposure.
He also believes innovation is forcing a broader reconsideration of what credible ETF offerings can look like.
“Active ETFs are gaining a lot of momentum,” he said. “603 active ETFs were launched in 2024. That now accounts for 26 per cent of the total ETF inflows.”
Whether it's rebalancing, accessing private markets, equitizing idle cash, or replicating derivatives exposure more cost-effectively, all agree that ETFs have become part of the institutional toolkit.
“ETFs have been here for a long time and they’re not going anywhere,” Eng said. “They’re really used as a complement.”
