Institutional investors and pension funds are deploying ETFs for liquidity, transitions, and portfolio completion, say ETF experts
Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on ETFs, how pensions are using them and the role it plays in institutional portfolios.
The global ETF industry hit a record $23.9 trillion in assets at the end of May 2026. According to several ETF experts, that represents a shift in how institutional investors are thinking about exchange-traded funds.
According to Deborah Fuhr, founder of ETFGI, pension funds have moved well beyond basic ETF adoption. The use cases now span liquidity management, strategic and tactical asset allocation, cash equitization, and transition management - where a plan terminating an active manager can park assets in a broad ETF while searching for a replacement.
“What you’re seeing is that some pension funds, sovereign wealth funds included, are actually taking assets they have and are asking for new ETFs to be created,” noted Fuhr. “Rather than questioning can we use ETFs or should we use ETFs, it's become a question of where ETFs can improve the implementation and efficiency of outcomes they want to deliver.”
Where ETFs improve efficiency of outcomes
Jennifer Li, director of institutional ETF solutions at CIBC Capital Markets, acknowledged ETFs improve implementation efficiency across several areas, though she emphasized that all institution's objectives differ.
While manager transitions are one example - where a traditional manager search can take months, and ETFs allow institutions to stay invested during that process rather than holding cash or accepting tracking error - cash equitization and liquidity management work in a similar way, keeping investors fully allocated between rebalancing cycles or contribution flows.
Li added that on-screen volume understates actual ETF liquidity, which is why engaging with market makers early matters for larger orders, transitions, and rebalancing programs.
For smaller pension plans and endowments with limited investment staff, ETFs also offer resource efficiency by reducing the need for repeated manager searches or individual security selection. Tactical implementation is another use case, particularly as the product landscape grows more specialized.
“Tactical implementation of certain views can be expressed via ETFs, especially now that the ETF product landscape is becoming more specialized, providing investors with very targeted exposures to certain themes and certain pockets of the credit market,” she said.
Why institutional investors are adopting ETFs now
For Bobby Eng, head of institutional ETFs at Franklin Templeton, the growth in institutional ETF adoption comes down to comfort. Pension funds, endowments, foundations, and sovereign wealth funds have grown familiar enough with ETFs to use them not just for short-term tactical trades but as longer-term strategic holdings.
"The typical holding period for an ETF several years ago was just a few months. Now the average holding period is well more than 2 years," he said, adding liquidity remains the primary draw - intraday trading lets institutional investors gain or shed exposure fast.
"They're not necessarily a product that people just invest in," Eng added. "They're realizing that these are investment tools that can help them in their job to achieve a certain goal."
According to Eng, the groups making the most use of ETFs tend to operate from a total portfolio management perspective - looking at the plan from the top down and identifying gaps across the entire allocation.
That aggregate view is where ETFs fit most naturally, particularly as the bulk of institutional ETF usage still centres on broad-based, low-cost products tracking benchmarks like the S&P 500, NASDAQ, EAFE, and emerging markets. But according to Eng, factor-based ETFs are also gaining ground.
“We're seeing more usage to tilt portfolios in certain factors like minimum volatility or value or high-quality small caps, and ETFs can certainly be very helpful to deliver a certain outcome if that's the view that the client wants to take,” he said.
Both Fuhr and Eng noted cash equitization and transition management rank high on the list to achieve goals while a pension fund moving between managers can stay invested through ETFs rather than sitting on the sidelines in a rising market.
According to the Coalition Greenwich, more than 80 per cent of institutional investors identified liquidity as the primary benefit of using ETFs, compared with 69 per cent in equities. The implication, Li said, goes beyond cost or convenience.
"ETFs are increasingly becoming a vehicle to solve portfolio management problems and not just investment problems," she said.
ETF allocation remains small
Still, while the shift from short-term tactical positions to longer-term holdings signals a deeper level of comfort from institutional allocators, it hasn't yet translated into large portfolio weightings. Li cited research from Coalition Greenwich which found that two-thirds of North American institutions allocate less than 10 per cent of total assets to ETFs.
She noted how larger institutions with $10 billion or more in assets tend to use ETFs sparingly because they can run separate accounts and custom mandates in-house whereas smaller plans lean on ETFs more because they offer institutional-quality diversification without the overhead.
ETF misconceptions remain widespread
Yet, Eng acknowledged the headline asset figures can be misleading as most institutional ETF usage still flows into market-cap-weighted, low-cost, passive products. Factor-based ETFs and fixed income products account for a smaller share. He added that while Canadian ETFs are part of the picture, institutional conversations tend to gravitate toward US-listed products, where the largest trades are concentrated.
"A lot of Canadian plan sponsors still treat ETFs as synonymous with index exposures," said Li. “I think the exposure decision and the vehicle decision are almost 2 separate but related questions. And the exposure is one where that can matter more than the vehicle of choice to get that exposure. For example, what return objectives are you targeting? What is the risk factors you're trying to manage and what markets am I trying to capture? An ETF is just a possible way to access that exposure. But over time, we're seeing that evolve, which is great to see.”
The active-versus-passive question is shifting, too. Fuhr said pension funds are turning to active ETFs, particularly in fixed income, where actively managed products have been popular for over a decade. She noted that equity active products have grown enough to surpass fixed income active in total assets, a reversal from just a few years ago.
On the risk side, Eng flagged a persistent misconception that will often trip up institutional investors.
"An institutional investor says, ‘Well, I can't trade this ETF because the size is too small, there's not enough volume,’" he said. “That may be true that the volume is fairly light, but that is not an indication of liquidity,” he said, adding the implied liquidity of an ETF - based on its underlying holdings - can be 10 to 20 times the average daily volume, a distinction that still requires repeated explanation.
Li pointed to tracking error, ownership concentration, and cost stacking as other risks that institutional investors need to watch. She also flagged the growth of thematic ETFs with no track record, where concentration risk within the fund itself deserves scrutiny alongside the broader question of portfolio fit.
Ultimately, Fuhr believes perception remains the hardest barrier to move among institutional investors.
"I think the challenge has always been that pension funds, [et cetera], think ETFs might not be a useful or helpful solution," she said. "I think once people end up trying ETFs, they do find that they're helpful in different ways and in different environments."
