Three data points from Cerulli’s latest research and what we’re hearing in the institutional conversations behind them.
The most interesting research reports often are the ones that don’t generate a press cycle. We think Cerulli Associates’ April 2026 white paper on institutional ETF adoption is one of those. It’s a quiet document. It contains a loud number.
U.S. and Canadian institutional asset owners held $337.2 billion in U.S.-listed ETFs at year-end 2025, up from $171.9 billion in 2020 (see chart next page). That’s a 14.4% five-year compound annual growth rate (“CAGR”), almost three times the 5.0% CAGR of the broader U.S. institutional market over the same period. Inside that aggregate, the growth is even more concentrated where you’d expect it to be, among the most sophisticated, fiduciarily constrained allocators: endowments grew their ETF allocations at 38.1% annually, foundations at 32.5%, and U.S. public defined-benefit plans at 23.6%.
That data confirms what we’ve been hearing for the past two years in conversations with consultants, outsourced chief investment officers (“OCIOs”), and institutional gatekeepers. It’s worth pausing on the magnitude. The structural case for the ETF wrapper isn’t being made anymore by issuers like us. It’s being made, slowly and deliberately, in the language of investment committee minutes, by the largest, most conservative allocators in the world.
Source: Cerulli Associates, Inside Institutional ETF Adoption, April 2026. Data through year-end 2025.
It’s worth sitting with what that means.
Use cases are expanding from operational to core
Cerulli’s interviews with 31 institutional investment teams surface a structural shift in how ETFs are being used. The historical use cases (transition management, equitizing residual cash, tactical positioning) are still present and still dominant. What’s new is the migration of ETFs into long-term core holdings. The most comprehensive ETF users at the institutional level are now deploying them as strategic, multi-year positions rather than implementation tools held for weeks. Among the largest holders are the Healthcare of Ontario Pension Plan Trust Fund ($12.9B in U.S. ETFs) and the Municipal Employees’ Retirement System of Michigan ($8.8B), the kind of patient, long-horizon capital that historically did not touch the wrapper at all.
This is consistent with what’s changed in our own conversations. Two years ago, an OCIO call about an active ETF was a curiosity meeting: an exploration of whether the structure could work for a portion of a satellite sleeve. Today, the same call starts further down the spectrum. The question isn’t, “could we use an active ETF here?” It’s, “where in the policy portfolio does this fit, and what’s the right pacing for the allocation?” That shift in the opening question is, in our experience, the clearest leading indicator of a category that has moved from experimental to operational.
Two forward-looking data points reinforce the trajectory. Of institutional asset owners not currently using ETFs, 16% told Cerulli they plan to begin using them in the next two years. Among current users, nearly half plan to increase their ETF use in the next 24 months. The first cohort represents net-new demand entering the market. The second represents share-of-wallet expansion from allocators who already know the vehicle.
The most sophisticated users (what Cerulli calls “ETF power users”) are doing something even more interesting. They’re co-manufacturing exposures directly with issuers, working bilaterally on fund design, capacity reservations, and bespoke active strategies that weren’t historically available in the wrapper.
This is what category maturation looks like in real time.
Why this is the inflection point
When institutions adopt a vehicle, two structural things generally happen.
The first is permanence. The wrapper graduates from “tactical instrument” to “core long-term vehicle” in the consensus mental model of allocators, consultants, and OCIOs. That mental shift can take a decade to build and is often irreversible once it’s there. Mutual funds went through this transition in the early 1980s when corporate defined-benefit plans began treating them as legitimate vehicles for active equity exposure. We believe ETFs are crossing the equivalent threshold now, but at a faster cadence, with active strategies as a central part of the story rather than an afterthought.
The second is depth of demand. The wholesale market for active ETFs has, until recently, been an advisor-driven phenomenon. Institutions entering the category at the rates Cerulli documents, create a demand pool that is an order of magnitude larger than what the advisor channel alone can produce. For active managers, particularly those running differentiated strategies in less-crowded categories, we think this changes the addressable market in a permanent way.
The seed-investor case
What’s interesting isn’t just that institutions are entering, but how.
Increasingly, sophisticated allocators are positioning themselves not as later-stage buyers of mature ETFs but as seed and anchor investors in smaller, newly launched ETFs. Three reasons surface in the conversations we’ve had with consultants, institutional and retail firms, family offices, and OCIOs over the past several quarters:
Capacity access. When a strategy is small, becoming a meaningful early holder secures capacity before it closes. The last 18 months have made the capacity question harder to ignore. Long/short and market-neutral mandates at the separately managed account (“SMA”) level have run into custodian-platform constraints, and at least one major manager has soft-closed its flagship strategy in 2026. Seed positions in a wrapper that doesn’t have a soft-close mechanism, by structural design, are a way to participate in active strategies without inheriting the capacity exit risk. We’ve heard this framed explicitly more than once: “We’re not trying to time the market on these. We’re trying to get a seat before the seat is gone.”
Scale economics that compound. Seed investors help an ETF cross the AUM thresholds that lower the total expense ratio, tighten bid-ask spreads, and improve creation-unit economics. Those improvements accrue to every share, including the seed investor’s own holdings. It is one of the few situations in asset management where being early is structurally compensated.
Fund-design influence. Co-manufacturing relationships, the practice Cerulli identifies among power users, give institutions a seat at the table on exposure parameters, hedging design, and capacity management that a standard institutional share class doesn’t provide. For allocators with specific portfolio construction needs, this is meaningfully better than buying a generic shelf product.
The §351 conversion mechanism
The path into a seed position has potential to be more tax-efficient than many institutions realize, because of a quietly important piece of the tax code: Internal Revenue Code Section §351 (“§351”).
In simplified terms, §351 permits the contribution of property, including securities held in a legacy SMA or institutional portfolio, to a corporation (the ETF) in exchange for shares of that corporation, on a tax-deferred basis, subject to certain control and diversification tests. Embedded capital gains in the contributed positions are not recognized at the time of conversion.
The most visible application of §351 in recent years was Dimensional Fund Advisors L.P.’s 2021 conversion of several mutual funds into ETFs, a transition that carried more than $30 billion through the structure on the asset-management side. Since then, the mechanism has been used by a growing list of asset managers and, increasingly, by advisor platforms converting concentrated SMA books into ETF vehicles for their clients without triggering the embedded tax bill. We’ve watched this play out at the advisor level in real time over the past 18 months. The number of conversations that begin with “we have a legacy SMA book with significant embedded gains, and we’re trying to figure out the cleanest way to migrate” has grown markedly.
For institutions sitting on legacy mandates with significant unrealized gains, particularly in concentrated equity strategies, completion portfolios, or long/short SMAs facing capacity constraints, §351 can provide a bridge between the structural argument and the operational reality. The thesis says the wrapper is more efficient. The tax code says you don’t have to write a check to get there.
What this all adds up to
We think the Cerulli data is the latest, and clearest, evidence that the structural case for the ETF wrapper has moved from a contrarian thesis to a consensus position among the most sophisticated allocators in the world. The patient capital (pensions, endowments, foundations, health systems) is voting with its allocations.
For institutions thinking about how to position in front of that wave, two threads of the conversation matter more than they did a year ago: seed positions in smaller active ETFs where capacity, economics, and influence still favor the early entrant, and the §351 conversion mechanism that makes the move from a legacy structure to a wrapped one, tax-deferred rather than tax-triggering.
In our view, the wrapper question is settled. The harder, more interesting questions are about how to position within it.
Brett Tracy is a portfolio specialist at Clough Capital Partners L.P. (“Clough Capital”), where he focuses on long/short equity strategies and ETF portfolio construction. The views expressed reflect the author’s analysis of publicly available industry research and the author’s direct conversations with institutional allocators, consultants, and OCIOs, as of June 2026.
Disclosures
This material has been prepared for informational and educational purposes only and does not constitute tax advice, investment advice, an offer to sell, or the solicitation of any offer to buy, and should not be relied upon for any investment decisions.
Internal Revenue Code §351 transactions involve specific structural, control, and diversification requirements; institutional investors and advisors considering a §351 conversion should consult qualified tax counsel and their independent advisors before proceeding. References to third-party research, including Cerulli Associates’ Inside Institutional ETF Adoption (April 2026), are made for illustrative purposes and do not constitute an endorsement.
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351 Exchange In-Kind Contribution Risk: At its launch, the Fund expects to acquire a material amount of assets through one or more in-kind contributions that are intended to qualify as tax- deferred transactions governed by Section 351 of the Internal revenue Code. If one or more of the in-kind contributions were to fail to qualify for tax-deferred treatment, then the Fund would not take a carryover tax basis in the applicable contributed assets and would not benefit from a tackled holding period in those assets. This could cause the Fund to incorrectly calculate and report to shareholders the amount of gain or loss recognized and/or the character of gain or loss (e.g., as long-term or short-term) on the subsequent disposition of such assets.
Transactions intended to qualify as tax-free exchanges under Section 351 of the Internal Revenue Code may not receive the anticipated tax treatment.
Tax laws, regulations, and IRS interpretations may change, potentially affecting the tax treatment of these transactions. Investors should consult their own tax advisors regarding the consequences of any Section 351 exchange and should not rely solely on general descriptions of tax treatment.
There can be no assurance that the IRS or other taxing authorities will agree with the intended tax treatment of a transaction. If a transaction fails to qualify for the expected treatment, investors may recognize taxable gain, incur additional tax liab