State Street (STT) kicked off a revolutionary investing trend when it launched the first U.S. exchange traded fund, SPDR S&P 500 ETF Trust (SPY), in 1993.
Today, there are some 2,000 U.S.-listed funds in the $5 trillion ETF industry. State Street’s S&P 500 tracking fund, which turned 25 years old in January, is the biggest U.S. ETF, with more than $270 billion in assets. The Boston-based asset manager’s SPDR U.S. lineup has expanded to 136 funds.
We touched base with Sue Thompson, Head of Americas Distribution for SPDR ETFs, to find out her thoughts on the industry and its potential growth. Thompson, who joined State Street in May, was CEO and president at Thompson Peak Advisory. Her previous experience includes helping BlackRock (BLK) and Vanguard grow their respective ETF businesses.
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IBD: State Street launched the first U.S. ETF — SPY — 25 years ago. Would you say the ETF industry’s growth met or exceeded State Street’s expectations?
Thompson: When State Street launched the first ETF in 1993, I don’t think anyone could have foreseen how large this industry would get. Even more importantly, I don’t think anyone could have predicted the ways in which ETFs would eventually get used — not just as investments but also as financial instruments. What’s clear though, is that there is still significant opportunity for growth in ETFs. We are still in early innings with respect to fixed income ETFs and we see significant opportunities for further global expansion.
IBD: You joined State Street in May and have worked at BlackRock and Vanguard. What do you hope to accomplish in the new role at State Street?
Thompson: I always thought that State Street had a great platform. State Street is one of the few ETF providers that has a strong presence in both the institutional and intermediary markets. My intention is to build on these client relationships. I want our clients to see us as the partner that best understands their needs and is best equipped to meet them in an unconflicted way. Our DNA is on the institutional side and as a result, we are keenly aware of what institutional investors need, which is scale and liquidity. That’s why SPY is still the most heavily traded ETF in the world, with the smallest spreads.
We also have a long history of working with financial advisors and believe in the power of financial advice. There have been a number of recent enhancements to our ETF lineup, including the launch of our ultra-low-cost SPDR Portfolio ETFs, that allow us to compete effectively for a larger part of investors’ portfolios. We have also made changes to our distribution team and strategy to better serve our clients with their portfolio construction needs.
IBD: State Street recently teamed up with actress Elizabeth Banks to launch ‘Crazy Enough to Work,’ a series of podcasts focusing on several midcap companies in SPDR S&P 400 Midcap (MDY). How did the collaboration come about?
Thompson: We wanted to take a thoughtful approach to developing content that our advisor clients could use to speak with their clients about companies that make up the midcap equity sector, because despite delivering higher annualized returns over the last two decades, midcap stocks receive little attention when compared to their large- and small-cap peers. Most advisors do not have content that is consumable for end investors on the go, so we took this innovative approach to how we are communicating with our target audiences, and ‘Crazy Enough to Work’ takes a fun and engaging approach to help investors get a closer look at several of these companies.
Growing Beyond SPY
IBD: There is a lot of competition out there in terms of both ETF providers and offerings. How can State Street continue to innovate?
Thompson: We take our heritage of innovation very seriously and have found that our best innovation arises out of the partnerships we have developed throughout the years. Whether that is partnering with clients on product innovation ideas or partnering with firms like TD Ameritrade (AMTD) to offer commission-free, low-cost ETFs to our clients, listening to our clients and not competing against them is the surest way to continued innovation.
IBD: Smart beta and ESG (environmental, social and governance) are two of the most recent trends among ETFs. What other trends are you seeing now?
Thompson: One very significant trend that we see continuing to grow and flourish is the adoption of model portfolios. Advisors continue to find that their time is most effectively spent working with their clients and understanding their needs as opposed to building portfolios from scratch.
The other trend that we see is increasing interest in looking at sectors and industries through not just our traditional sector lineup, which is the most robust in the industry, but also through a dynamic lens focused on the new economy.
The future is now, and we want to provide clients access to pursue the potential impact that innovation in robotics, artificial intelligence and genetics will have on transforming our economy. That’s why we’ve partnered with Kensho Technologies, a data analytics and machine learning firm, on a number of products ranging from Smart Transportation to Future Security, ultimately providing exposure to firms disrupting industries and driving innovation within our economy.
IBD: Speaking of ESG, has there been much interest in SPDR SSGA Gender Diversity (SHE)?
Thompson: State Street was inspired to develop the SSGA Gender Diversity Index and launch SHE by the California State Teachers’ Retirement System’s (CalSTRS) efforts to move the needle on gender diversity in corporate America, especially for women in leadership positions, and we have been pleased with the attention that it has generated. It has also been a catalyst for some of our stewardship efforts under the leadership of Rakhi Kumar, head of ESG Investments and Asset Stewardship at State Street Global Advisors. However, we think it’s important that our ESG lineup continues to grow and develop as this part of the industry evolves toward a common set of standards and definitions. We are fortunate that, in addition to Rakhi and her group, we benefit from insights from clients who have a strong passion for this area.
IBD: Which of your funds/strategies have seen the most inflow this year?
Thompson: One particular area of focus for our clients has been fixed income and specifically adapting to the rising rate environment. As a result, we have seen a great deal of interest and flows into some of our shorter-duration products. Specifically, into floating-rate structures. The SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN), an investment grade floating-rate note ETF, has taken in $2.2 billion this year, increasing its asset based by 133%. Another fund with strong flows is the SPDR Blackstone/GSO Senior Loan ETF (SRLN), which is subadvised by Blackstone/GSO. It has seen $1 billion of inflows in 2018, significantly higher than any competitor products. As clients have shown a strong preference for active management in this space, interestingly enough, other active managers have chosen to use SRLN in their own strategies.
IBD: State Street is among the low-cost leaders with its SPDR ETFs. Do you think costs can go even lower?
Thompson: At State Street, we remain committed to reducing costs where possible while ensuring we continue to provide valuable, well-crafted SPDR ETFs to investors.
IBD: What advice would you give investors who are nervous about the long-running bull market?
Thompson: Offense wins games, but defense wins championships. Sit down with your financial advisor and go over your asset allocation mix to ensure your portfolio is built with a strong core foundation, diversified across asset classes offering capital appreciation but also downside protection. We are 10 years past the financial crisis and beyond gold, aggregate bonds were one of the only asset classes with positive returns in 2008. Additionally, as this is a late cycle environment, for investors who wish to be a bit more tactical, consider allocating to late-cycle opportunities with strong growth characteristics, like technology, or that are highly correlated to inflation, like real assets.
IBD: What factors should investors consider if they’re shopping for ETFs?
Thompson: The quality of the provider. Do they have a history of innovation? What is their expertise in the ETF industry? How much does the provider align with your own philosophy? For the ETF itself, understand the exposure that you are getting and look at the total cost of ownership, which is more than just the expense ratio.
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