Article For sovereigns, the role of ETFs is expanding into a tool for all seasons

How sovereign wealth funds use ETFs

The market for global ETF assets under management has expanded far beyond its origins in passive equity index tracking. Now it also encompasses fixed income, active strategies, thematics, factors, and alternatives. The past decade has produced sustained institutional demand for flexibility, scalability, liquidity, and implementation precision. ETFs are increasingly one answer to that demand.

Sovereign wealth funds (SWFs) and central banks have not historically been prominent drivers of this growth due to their divergent scale, governance requirements, and liquidity needs. However, adoption among official institutions has been building steadily, and it shows in this year's Global Sovereign Asset Management Study. Just under 40% of respondents now use ETFs, with usage growing across all institution types and expectations pointing firmly toward further adoption over the next three years (Figures 1 and 2). 

Investment sovereigns and liability sovereigns lead with 58% and 53% reporting current ETF use, respectively. Central banks sit at 31%. Development sovereigns are the most selective at 24%, reflecting mandates that favour direct holdings, strategic stakes, and active ownership over listed wrappers.  

For this year’s study, the 14th in our annual series, we interviewed 144 senior investment professionals (90 sovereign wealth funds and 54 central banks) whose institutions collectively manage approximately US$29 trillion in assets. ETF usage emerged as a key theme.

Why central banks are increasing ETF adoption

For central banks, the ETF wrapper offers a route into exposures that would otherwise require more internal resource, more manager infrastructure, or more operational complexity. Strategic long-term exposure is the most cited role for central banks (Figure 3).

A Latin American central bank described ETFs as the natural option for gaining equity exposure for the first time. Ease of use and competitive pricing were the deciding factors. A European central bank said equity ETFs were the most efficient way to gain passive exposure to global markets as the portfolio expanded beyond fixed income. For reserve managers, ETFs offer a clean entry point into new exposures without requiring a full redesign of the reserve management model.

In the study, central bank ETF users most frequently cited ease of use and operational simplicity as important considerations (Figure 4). Other factors cited by respondents included cost, liquidity, holdings transparency and access to multiple exposures.

Sovereign wealth funds use ETFs for various reasons

Sovereign wealth funds tend to describe ETFs differently. The wrapper is more often a tool that makes the rest of the portfolio easier to manage. Tactical asset allocation and liquidity management are the most cited roles (Figure 3) in a more complex portfolio. As such, transparency of holdings and liquidity are the attributes that matter most (Figure 4).

However, not all sovereign wealth funds treat ETFs as purely tactical. 39% said that they were using the wrapper for strategic long-term exposure. A European investment sovereign said ETFs have always been a strategic building block, and their scope is now expanding into alternative asset classes. For most SWFs, ETFs remain an implementation tool, but a growing minority are embedding them more deeply into portfolio architecture.

Role of ETFs in institutional portfolios

Passive equity and passive fixed income ETFs are by some distance the dominant forms across both groups. Particularly among sovereign wealth funds, thematic ETFs are gaining ground. Several respondents described using them to gain targeted exposure to structural investment themes, including the energy transition, digital infrastructure, and technology, without the lead time required to build internal capability or appoint a specialist manager. An APAC investment sovereign said thematic ETFs allow exposure to specific ideas "without building positions stock by stock." Institutions can also participate and learn about a structural theme at modest scale while they decide whether to build a more substantial internal programme. For central banks, commodity ETFs serve as efficient gold exposure without the operational requirements of physical bullion, a well-established and growing use case. 

Active ETFs are a growing interest

Active ETFs remain at an early stage of adoption, with most respondents yet to implement them. Among sovereign wealth funds, 7% are already allocating and a further 26% are considering it. "Active ETFs can offer better risk control than plain passive exposure, with lower costs and simpler implementation," said one APAC investment sovereign.

One European liability sovereign said while the attractions are real, in principle, fee levels relative to directly managed or delegated mandates remain a barrier. Another said the argument was straightforward: "We buy active management for 10 to 15 basis points. There is no advantage for us in an active ETF at this point." An APAC investment sovereign said the institution was taking a cautious approach and wanted to see a longer track record before committing. 

ESG and alternative adoptions are slowly growing

ESG and alternative ETFs show a similar pattern of moderate interest and adoption (Figure 5). Among central banks, 12% are already allocating to ESG ETFs. For central banks moving into equities for the first time, Paris-aligned or broad ESG indices offer a practical way to meet governance and mandate requirements without building a bespoke framework.

For sovereign wealth funds, the constraint on ESG ETFs is often about control, with concerns a passive wrapper cannot deliver the targeted implementation sustainability objectives require. Several respondents described passive ESG wrappers as containing companies they would not want to own, with index construction and reporting standards not meeting their requirements. 

For alternative ETFs, the question was often whether a listed wrapper can genuinely deliver the characteristics that make alternatives attractive in the first place — illiquidity premia, low correlation to public markets, and differentiated return streams. A longer track record might help answer this.

Conclusion: ETFs are taking a broader role

ETFs are taking on a broader role across sovereign portfolios, though the reasons often vary considerably by institution type. Active, ESG, and alternative ETFs adoption remains selective. The institutions furthest along on ETF usage are those that have been clearest about what role the wrapper is playing. The trajectory of adoption points firmly toward a more embedded role across both institution types.

The study suggests ETFs are being used where institutions place greater importance on implementation speed, liquidity, transparency and operational simplicity, while other approaches may offer greater scope for customisation and control. The evidence supports the following: Passive equity and fixed income ETFs are established. Thematic ETFs have a credible implementation and learning role. Active ETFs face cost and track-record hurdles. Meanwhile, ESG ETFs face customisation and control constraints. Alternative ETFs face a more fundamental question about whether the wrapper preserves the true desired exposure. 

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2026 Global Sovereign Asset Management Study

Frequently asked questions

How widely are ETFs being adopted by sovereign investors?

 ETF adoption among sovereign wealth funds and central banks is growing steadily, with nearly 40% of institutions now using them. This trend is expected to continue, with around half of respondents planning to increase their ETF usage over the next three years as part of broader portfolio evolution.

Why are central banks increasingly using ETFs?

For central banks, ETFs can provide a simple and efficient way to access new asset classes, particularly equities. Respondents cited ETFs as one way of accessing new asset classes, particularly equities, with ease of use and operational simplicity among the considerations highlighted in the study.

How do sovereign wealth funds typically use ETFs in their portfolios?

Sovereign wealth funds primarily use ETFs as implementation tools rather than core holdings. They support tactical asset allocation, liquidity management, portfolio transitions, and thematic exposure, complementing direct investments and active mandates rather than replacing them.

Which types of ETFs are gaining traction among sovereign investors?

 A: Passive equity and fixed income ETFs remain the most widely used. However, thematic ETFs are gaining traction, particularly among sovereign wealth funds seeking targeted exposure to trends such as energy transition and digital infrastructure without building in-house capabilities.

Source: Invesco Global Sovereign Asset Management Study 2026