ETF Assets in Pensions, Other Institutions Surged 22% in 2023

ETF assets in U.S. and Canadian pension plans, endowments, and other institutions surged 22% in 2023 amid the year's bull market, boosting the total under management among these organizations to $56 billion.

Investments in ETFs by “asset owner” institutions, which also include sovereign wealth funds and foundations, have quadrupled over the past decade, with most of the growth happening in the past three years, a report from S&P Dow Jones Indices found.

Similar to retail investors, institutions have migrated to ETFs from mutual funds largely due to the comparatively low management fees and broad product offerings. Pension plans, unlike employer-sponsored 401k plans, can easily hold ETFs and individual stocks. While some ETFs can be held in 401k plans, the structure of the retirement plan largely favors mutual funds.

"The growing ETF usage among asset owners reflects the ongoing shift of assets from active to passive or index-based strategies, a trend that has been going on for the last few decades," explained a spokesperson for S&P Indices. 

AUM benefited largely from increased valuations as the number of shares was approximately flat in 2023, the report said. 

The S&P 500 index gained 24% in 2023, while the tech-heavy Nasdaq 100 jumped 54%, its gains driven largely by artificial intelligence euphoria in the technology sector. The SPDR S&P 500 trust ETF (SPY), the largest and oldest ETF, wrapped up 2023 with a 25% gain.

University endowments, pensions, and other institutions, which first dabbled in ETFs in 2013, have increased their investments dramatically since 2019. 

The annual compounded growth rate of ETF usage in plans has been 28%, causing AUM to double about every three years, the report noted. These institutions have invested in 541 ETFs, five times the total in 2019, according to the report. 

More than 78% of ETFs used by these institutional plans are in stock funds, while only 21% are in fixed income, the report noted. 

Institutional ETFs

Government pensions are by far the largest group of institutions using ETFs, composing over two thirds of the assets in these institutions. Yet endowments are investing in ETFs at the fastest rate, according to the report. Foundations hold the fewest ETF assets in the category.

Although the majority of assets are in equity funds, investments in fixed income products have grown at a steady rate since 2019, according to the report. Large cap equity ETFs are the largest category, followed by blended cap.

Contact Lucy Brewster at [email protected].