<!-- Swiftype Variables -->

Q&A

New efforts in ETF market set pace for SSGA

New products and fresh hires demonstrate State Street Global Advisors is not settling for third-place in the exchange-traded fund business.

Those moves include:

For years, ETFs in the U.S. were synonymous with SPDRs, the ETF brand adopted by SSGA and named after Standard & Poor's depository receipts, the first ETF offering launched in 1993 under the ticker SPY. Despite competing S&P 500 ETFs from Vanguard and BlackRock, SPY remains the largest ETF and the most heavily traded security in the world.

Including SPDR Gold Shares, marketed on behalf of the World Gold Council, SSGA manages 149 exchange-traded products with $516 billion in assets under management, $235 billion held by SPY, according to research firm XTF. Moreover, as a custody bank, State Street services 55% of all global ETF assets, the company said in April.

Yet SSGA's original lead in overall ETF assets was long ago ceded to BlackRock's iShares ETF suite, which offers more than two times as many products accounting for $1.16 trillion in ETF assets under management in the U.S. alone, and to Vanguard, with its 70 products and $730 billion in assets under management.

SSGA estimates 40% of its ETF assets can be traced to institutional investors, based on available data, including 13-F filings.

Pensions & Investments recently interviewed Cyrus Taraporevala, head of SSGA's global institutional group, Nick Good, co-head of the global SPDR business, and Mr. Archard, to discuss SSGA's approach to institutions and the ETF business. What follows in an edited transcript of those conversations, conducted in person as well as through email.

P&I: What are some examples of the steps the company is taking to sync ETFs and institutional indexing needs or requests?

Mr. Taraporevala: Given the heritage of the SPDR brand and SSGA's decades of experience in helping to solve institutional investment challenges, we believe we are in a great position as ETFs become a vehicle of choice for a greater number of institutional investors seeking to reduce fees and increase the liquidity and transparency of their holdings. For example, we are seeing a variety of institutional uses, such as asset managers using ETFs for cash equitization, and insurance companies using fixed-income ETFs in their general accounts. We expect the trend of institutional investors increasingly using ETFs will continue to unfold over the next decade.

P&I: With the significant growth of ETF usage among institutions of all sizes over the past few years, how is your business responding?

Mr. Good: We are investing heavily in our ETF business. In the year ahead, we expect to increase the size of our SPDR sales team focused on institutional clients by 50%. This growth comes on the heels of building our thought leadership, portfolio analytics and capital markets capabilities over the past two years.

P&I: Where do you see the opportunity for new clients and asset growth, from a product perspective?

Mr. Archard: Growth in assets will come from a combination of current, and planned, products. We're having a lot of success working with our clients to better utilize our existing products, based on their macro views. We are also looking at new products that reflect our viewpoint on various management techniques. We also see the potential for new clients to come to us through different forms of product or servicing partnerships.

P&I: What continues to surprise you in the markets you serve?

Mr. Good: Even at the top of the institutional market, I have seen portfolios getting beta performance using anywhere from five to 100 active managers. The managers are all canceling each other out and the institutions are stuck paying active fees. I'll often say, “You can outperform that by getting rid of the active fees, or keeping one or two managers that you really have confidence in and putting the rest into index products or ETFs.” To answer the questions of what is the risk profile and what is the performance attribution, we've seen demand for more capable portfolio analytics.

Our biggest challenge is that institutional investment guidelines take time to change. Some have changed. But, to be fair, some investment committees still like the idea of active managers who can be hired and fired.

P&I: What do you see as the barriers to ETF usage among pension fund, foundation and endowment investors?

Mr. Archard: A lot of infrastructure has been built around traditional means of running portfolios. Over time, many institutions have seen the benefit of the simplicity in the ETF model. Take fixed-income ETFs. You can move hundreds of line items in bonds to just one ETF. This simplifies lives on the trading desk and the CIO team. ETFs have also grown over time as both long-term holdings and tools for the trading community. When looking for new products, we have to focus on what our clients are trying to achieve and how can our expertise on the capital markets and trading side help to create new products or otherwise help them manage their portfolios. The unsung hero of ETF growth has been operational simplicity.

P&I: If service to institutions is part of SSGA's strength, where do you see the most room for improvement in the SPDR business?

Mr. Good: Last year, our U.S. ETF business had its best year in terms of asset flows since 2008, attracting nearly $50 billion of net new assets. Much of this growth can be attributed to our work in the field with intermediaries including national broker/dealers, independents, registered investment advisers and wealth managers. Many of these intermediaries were early adopters of ETFs, however, we're still seeing a significant number that are just starting to migrate to SPDR ETFs from traditional mutual funds and single stocks.

To improve the client experience for all intermediaries, regardless of where they may be in the ETF adoption curve, we've focused on putting the people and processes in place to ensure we're leveraging SSGA's global investment presence and market insights to drive product development and provide intermediaries with portfolio analytics and ETF implementation ideas that can help them provide better investment services and strategies to their clients. This includes our work with NextCapital Group Inc. and RBC Correspondent Services on asset allocation models.

P&I: What about reaching global investors, including sovereign wealth funds?

Mr. Good: While growing in Europe and Asia, we've been in Australia for years and have grown the Tracker Fund of Hong Kong. While sovereign funds are generally looking to support domestic markets, they are also looking to maximize returns so they will also go where the liquidity is. They are not constrained and many have a New York office for non-domestic currency investments. Ultimately, the investment decision-makers are in the home country and so it's critical for SSGA and SPDR to be there to support them.

P&I: How does the range of experiences on the global ETF and institutional teams shape your approach to the market?

Mr. Taraporevala: Long before the launch of SPY, the world's first ETF, SSGA was providing indexed investment solutions to the world's largest, most sophisticated investors. Without question, many investors have become more comfortable with the structure, liquidity and expenses of ETFs in recent years. This shift started with institutions using ETFs for liquidity management and, as their comfort level increased, ETFs have taken on a much greater, permanent role in their portfolios. Given our scale and success as an institutional asset manager and ETF provider, we are in a unique position to help clients with this transition by incorporating ETFs alongside other investment vehicles in our offering to institutional clients, to better meet their investment goals. We start by understanding each client's needs and the exposures they want. Then we figure out the best vehicle — be it an ETF, separate account, or commingled fund, to meet those needs.