Institutional investors have long used exchange-traded funds as a stopgap — equitizing cash or maintaining market exposure while shifting assets between managers.

Increasingly, ETFs are doing more than that. Across pensions and endowments, they are being used to replace in-house indexing teams, counterbalance active managers, and provide access to markets that once required dedicated mandates or complex operational setups.

The shift shows up in the data. U.S. and Canadian institutions have roughly doubled their use of ETFs over the past five years, reaching $337 billion, according to research from Invesco and Cerulli Associates to be released on Tuesday. ETFs still account for a small share of most institutional portfolios—typically between 0.5 percent and 3 percent — an indicator that the shift is less about wholesale adoption and more about how specific parts of portfolios are being rethought and implemented. For the ETF study, Cerulli did a series of interviews with 31 investment decisionmakers at institutions with at least $1 billion in assets.

One of the clearest examples of that shift is the Municipal Employees’ Retirement System of Michigan, which moved away from running index portfolios in-house. The low fees on ETFs called into question whether the cost of internal staffing, training, and the risk of mistakes was worth managing assets in-house.

Garrett Glawe, head of asset owner ETF specialists at Invesco, said MERS Michigan, run by CIO Jeb Burns, now has 50 percent of its portfolio in ETFs and uses them to make quarterly tactical adjustments. “They can readjust to investment grade bonds versus high yield very easily using ETFs, right? You don't need to hire a new manager. It's literally just a click of a button,” he said. Forty-five percent of survey participants used ETFs for tactical bets.

Some large investors are using ETFs as a counterbalance to active managers that run concentrated portfolios. The State of Wisconsin Investment Board and the Texas Permanent School Fund, for example, have built $1 billion positions in equal-weight ETFs to keep those managers but “provide some ballast to the portfolio, in case the equity markets broaden out,” said Glawe. That’s when the equal-weight ETF would do well.

Smaller institutions’ decisions on ETFs are often as much about time as cost. With limited staff overseeing increasingly complex portfolios, many are using ETFs for liquid markets and then focusing their efforts on private markets, where they believe they can add more value. As one investor told Brendan Powers, director of product development research at Cerulli, “We’ve managed the S&P 500 in-house before… we’re just a small team and it was not really worth it.”

Powers said the ETF shift reflects a broader change in how institutions think about implementation.

ETFs are being used much more actively than people might expect, he said. Even though they’re often labeled passive, institutions are using them to express views, adjust allocations, and in some cases replace traditional mandates.

Powers added that a mid-size public plan that was searching for a high-yield bond manager chose an active options-based strategy that was only available as an ETF, while a small endowment chose a quantitative small-cap ETF when it was hunting for a small company manager. “They're not just going to use it as an operational tool, or to make a tactical bet, it’s part of that core position search,” he said.

ETFs are also being used to replace or stand in for things that used to be illiquid or operationally complex. North Carolina State and New Jersey Police and Fire are using bank loan ETFs, which have the highest 10-year correlation to private credit of Invesco’s fixed income line-up, as a proxy for the asset class or a temporary placeholder before capital calls.Glawe said some institutions, including MERS, are even lending out their book of bank loan ETFs, which charges .65 percent, to recoup the fees.

For now, most institutions still use ETFs for operational or tactical purposes — managing cash, maintaining exposure, or expressing short-term views. Only a smaller group is pushing further, using them as core holdings or replacing long-standing mandates. But that divide may shrink further and will reflect how far institutional investors are willing to take them.

ETFs are blurring lines that once defined institutional portfolios — between active and passive, public and private, internal and outsourced.

The shift says as much about institutions — their size, staffing, and need for flexibility — as it does about ETFs themselves.

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ETFs Are Quietly Rewiring Institutional Portfolios