The “arms race” relationship between transposable elements (TEs) and their host has promoted a series of epigenetic silencing mechanisms directed against TEs. Retrotransposons, a class of TEs, are often located in repressed regions and are thought to induce heterochromatin formation and spreading. However, direct evidence for TE–induced local heterochromatin in mammals is surprisingly scarce. To examine this phenomenon, we chose two mouse embryonic stem (ES) cell lines that possess insertionally polymorphic retrotransposons (IAP, ETn/MusD, and LINE elements) at specific loci in one cell line but not the other. Employing ChIP-seq data for these cell lines, we show that IAP elements robustly induce H3K9me3 and H4K20me3 marks in flanking genomic DNA. In contrast, such heterochromatin is not induced by LINE copies and only by a minority of polymorphic ETn/MusD copies. DNA methylation is independent of the presence of IAP copies, since it is present in flanking regions of both full and empty sites. Finally, such spreading into genes appears to be rare, since the transcriptional start sites of very few genes are less than one Kb from an IAP. However, the B3galtl gene is subject to transcriptional silencing via IAP-induced heterochromatin. Hence, although rare, IAP-induced local heterochromatin spreading into nearby genes may influence expression and, in turn, host fitness. Transposable elements (TEs) are often thought to be harmful because of their potential to spread heterochromatin (repressive chromatin) into nearby sequences. However, there are few examples of spreading of heterochromatin caused by TEs, even though they are often found within repressive chromatin. We exploited natural variation in TE integrations to study heterochromatin induction. Specifically, we compared chromatin states of two mouse embryonic stem cell lines harboring polymorphic retrotransposons of three families, such that one line possesses a particular TE copy (full site) while the other does not (empty site). Nearly all IAP copies, a family of retroviral-like elements, are able to strongly induce repressive chromatin surrounding their insertion sites, with repressive histone modifications extending at least one kb from the IAP. This heterochromatin induction was not observed for the LINE family of non-viral retrotransposons and for only a minority of copies of the ETn/MusD retroviral-like family. We found only one gene that was partly silenced by IAP-induced chromatin. Therefore, while induction of repressive chromatin occurs after IAP insertion, measurable impacts on host gene expression are rare. Nonetheless, this phenomenon may play a role in rapid change in gene expression and therefore in host adaptive potential.