Endosymbiosis underpins the evolution of complex life and the function of diverse ecosystems, but the mechanisms driving the origin and stability of endosymbiosis remain unclear. Fitness trade-offs between intracellular and extracellular niches could drive the emergence of stable endosymbiosis if adaptation to the intracellular niche reduces fitness in the extracellular niche, reinforcing endosymbiosis through niche specialisation by the endosymbiont. We tested this hypothesis by quantifying phenotypic divergence between endosymbiotic and free-living populations of a facultative algal endosymbiont along trait axes predicted to contrast between its intracellular and extracellular lifestyles. Consistent with endosymbiont specialisation, we observed strong divergence involving multiple traits between endosymbiotic and free-living populations. Specifically, endosymbionts showed convergent losses of multiple nitrogen metabolism pathways, increased export of maltose and glucose, increased sensitivity to acidification, higher and less variable photosynthetic efficiency, and reduced free-living growth rate. Intracellular environments are stable, safe from natural enemies, and come with a reliable supply of specific nutrients, but are acidic and place demands upon endosymbionts to provision their hosts; our data suggest that adapting to this niche is likely to reduce free-living growth and survival of endosymbionts. Our findings support fitness trade-offs between contrasting intracellular and extracellular environments as a mechanism stabilising endosymbiosis by driving evolutionary entrapment of niche-specialist endosymbionts.