Retrotransposons are populated in vertebrate genomes, and when active, are thought to cause genome instability with potential benefit to genome evolution. Retrotransposon-derived RNAs are also known to give rise to small endo-siRNAs to help maintain heterochromatin at their sites of transcription; however, as not all heterochromatic regions are equally active in transcription, it remains unclear how heterochromatin is maintained across the genome. Here, we address these problems by defining the origins of repeat-derived RNAs and their specific chromatin locations in Drosophila S2 cells. We demonstrate that repeat RNAs are predominantly derived from active gypsy elements and processed by Dcr-2 into small RNAs to help maintain pericentromeric heterochromatin. We also show in cultured S2 cells that synthetic repeat-derived endo-siRNA mimics are sufficient to rescue Dcr-2-deficiency-induced defects in heterochromatin formation in interphase and chromosome segregation during mitosis, demonstrating that active retrotransposons are required for stable genetic inheritance.