Product innovation in exchange-traded funds is surging as systematic or quantitative indexing and actively managed ETFs attract net flows that eclipse their existing market share. Yet for State Street Global Advisors, the third-largest ETF issuer, industry observers say that its greatest opportunity for growth may be in the simplest products — low-cost passive exposures on well-known indexes.
In late 2017, SSGA launched SPDR Portfolio ETFs to compete directly with iShares Core, launched in 2012, and Vanguard's suite of index ETFs. While other asset managers at the time, specifically Charles Schwab and Invesco, also covered basic exposures across asset classes at low prices, iShares and Vanguard ETFs tracked indexes that aligned with common institutional benchmarks. This alignment enhanced their utility as traders, institutional investors and funds were comfortable employing such ETFs in both core holdings and tactical positions, as well as for liquidity management and cash equitization.
Growing SPDR Portfolio will likely be a top priority of incoming chief business officer, Anna Paglia. After 13 years at Invesco, including the last three and a half leading its ETFs and index business, Paglia will join SSGA in the new year to grow the global ETF, index, cash, and defined contribution businesses under CEO Yie-Hsin Hung.
Now encompassing 24 products, SPDR Portfolio ETFs are highly competitive on expense ratios, including a 2-basis-point exposure to the S&P 500 through the SPDR Portfolio S&P 500 ETF, or SPLG. By comparison, S&P 500 ETFs from Vanguard and iShares charge 3 basis points and the $436 billion SPDR S&P 500 ETF (SPY), at 9.45 basis points, is structured as a unit investment trust that limits its ability to reinvest dividends, but makes it a cleaner hedge for traders.
Yet, according to an analysis by FactSet Research Systems, SPDR Portfolio significantly lags in assets. As of Nov. 24, SSGA managed $164 billion in SPDR Portfolio assets, compared to $1.2 trillion for comparable Vanguard products and nearly $1 trillion for the iShares Core suite. (Across all ETFs, iShares manages $2.5 trillion, compared to $2.2 trillion for Vanguard and $1.1 trillion for SSGA.)
"Historically, SSGA has focused on liquidity and institutional investors," said Todd Rosenbluth, head of research at VettaFi, a data and analytics provider, "but there's still opportunity in the low-cost portfolio products."
Rosenbluth believes that there's more "head- way to be made with new ETF investors as they switch over from mutual funds or begin to save for retirement" rather than trying to convince established investors to trade out of their positions. Performance differences across Vanguard, BlackRock and SSGA's low-cost index products were minimal and not consistent, according to data provided by FactSet.
"There's not much differentiation," said Komson Silapachai, partner at ETF strategy firm Sage Advisory, which has roughly $22 billion in assets tracking its strategies. Sage, which publishes an annual survey of ETF provider transparency and stewardship, is looking to build relationships with providers that help to support their investment process, including how those managers engage with companies and vote proxies.
"Is the manager fulfilling the whole exposure? Do we (Sage) have access to portfolio managers or strategists? Are they available for our clients?" Silapachai asked. "After all, switching costs are non-zero."
Elisabeth Kashner, vice president, director of global fund analytics at FactSet, said that tracking error and trading spreads should be significant factors when evaluating similar low-cost products. And while ETF liquidity is ultimately a function of the liquidity of underlying holdings, average daily trading volume at significant scale helps to reduce the cost of moving in and out of positions.
The combination of the lowest cost and competitive spreads and volumes has attracted assets recently to SSGA's S&P stock index ETFs. For example, SPLG is growing assets faster than its current market share among S&P 500 ETFs, including SPY. And the SPDR Portfolio S&P 600 Small Cap ETF has added $3.9 billion of its $8.4 billion in assets this year, compared to the $1.9 billion added to the $67.5 billion iShares Core S&P Small Cap ETF. For international equity and U.S. fixed income, though, SPDR portfolio products are inconsistent in price leadership, performance, tracking or volumes, said FactSet's Kashner.
Even at bargain-basement expense ratios, growth in assets for the SPDR Portfolio suite likely offers better economics than many of SSGA's top ETFs. For example, SPY is sponsored by a unit of Intercontinental Exchange; the Select Sector ETFs are distributed by ALPS Portfolio Solutions Distributor; and SPDR Gold Shares (GLD) is sponsored by the World Gold Council. Even SPDR is a trademark of S&P Global. Top products from BlackRock's iShares and Vanguard, by comparison, divert little from the expense ratio to third parties beyond index licensing and custody and servicing fees.