ETFs: The New Titans in Institutional Portfolios

Once relegated to cash and transition management, exchange-traded funds (ETFs) have now captured the strategic attention of institutional investors. The ongoing financial landscape reshuffle is urging asset owners to harness the liquidity, diversification, and cost-effectiveness that ETFs promise. Could this mean the end of traditional mutual funds?

Rising Attraction: From Niche to Core Holdings

In the past decade, asset owners who valued ETFs for cash management have discovered wider benefits. Institutional portfolios are adopting these vehicles as longer-term holdings. Reporting from State Street Investment Management underscores a worldwide presence of over 9,500 ETFs amassing $13.8 trillion in assets.

The story doesn’t end here. What’s pivotal is the $1 trillion inflow into U.S. ETFs as of 2025. Despite being a minor slice of the institutional pie today, implications suggest that regulatory advancements and more strategies could make ETFs a substantial presence in future portfolios.

Core Holdings: Embracing the Liquidity Edge

Early data from Cerulli Associates points to 27% of institutional asset owners, notably public benefit plans, using ETFs as core holdings. As per Jack Tamposi, associate director at Cerulli, these funds offer broad-market exposure, bolstered by an increasingly indispensable liquidity on public fronts amidst fluctuating private markets.

The Cerulli survey illuminates how the demand for ETF-driven liquidity surges during fiscal challenges, such as the bad exit climate in private equity and looming tax changes on endowments this year.

ETFs Outshine Mutual Funds in the Growth Race

The adoption trajectory also indicates that government pension funds continue leading the charge, with a noteworthy 78% of ETF investments landing in equity, particularly large-cap. The trend mirrors data showing fourfold increased usage post-COVID-19.

David Mann of Franklin Templeton echoes the sentiment. From core allocations to tactical bids, the appeal of ETFs continues to expand, thanks to the flexibility and variety they provide. His insights highlight how ETF product diversification can cater to strategic investor needs.

Shift from Mutual Funds: The Adaptation Period

Could mutual funds be losing their luster? Preliminary research suggests displacement, narrated by the mounting institutional allocation towards ETFs over mutual funds. SEC’s recent relief decision for Dimensional Fund Advisors, further enabling ETF share classes, bolsters this enthusiastic shift from legacy structures.

Small Institutions Eye ETF Benefits

Smaller institutions start to lean towards ETFs not just for niche sectors but for practical reasons — swift implementation, cost reduction, and operational ease conforming to their structural biases. NEPC’s Will Forde emphasizes how smaller clients use ETFs effectively for tactical purposes like hedging and tax-loss harvesting.

John Frank of Invesco adds a layer, detailing clients’ preference for factor-based and indexing ETFs. Meanwhile, newer ETF strategies — from active management to digital assets — are paving avenues. Mann remarks on growing investor demand, predicting an evolving narrative for ETF application in portfolios.

Would this signaling of a diverse and enabling ETF landscape rewrite the institutional investing playbook? According to Chief Investment Officer, it’s a narrative still being embraced and written by institutions worldwide.