State Street (STT) set in motion the ETF juggernaut that revolutionized stock market investing in America and created a bright future for millions of ordinary citizens.
As SPDR S&P 500 (SPY) approaches a milestone birthday — 25 on Jan. 22 — IBD caught up with Noel Archard, head of global SPDR product, to learn where both the company and the $3 trillion industry it spawned are headed to next.
Archard joined State Street Global Advisors in May and previously helped to the build ETF businesses at BlackRock (BLK) iShares and Vanguard. As such, Archard has worked at each of the three largest providers of ETFs, which together manage more than 80% of all industry assets, making his a unique perspective on exchange traded funds.
IBD: As an established and pioneering firm, how does State Street continue to innovate?
Noel Archard: The SPDR ETF business is built on consistently opening or improving access to asset classes, strategies and managers. Our long list of first-to-market products includes the first sector ETFs; SPDR Gold Shares (GLD), the first gold-backed exchange-traded security in the U.S.; SPDR Blackstone/GSO Senior Loan (SRLN), the first actively managed senior loan ETF; and SPDR S&P 500 Fossil Fuel Reserves Free (SPYX), the first S&P 500 fossil-fuel-free ETF.
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More recently, we’ve partnered with other industry leaders like the California State Teachers Retirement System (CalSTRS) to launch SPDR SSGA Gender Diversity Index ETF (SHE) and with DoubleLine on a suite of actively managed bond ETFs that includes SPDR DoubleLine Total Return Tactical (TOTL).
With the total number of U.S.-listed ETFs now over 1,800, we strongly believe that responsible innovation is more important than ever before. To meet this obligation, we continue to tighten our criteria for launching ETFs and remain excited by the prospects of innovating with not only new products, but also new ways in which ETFs can be used to create long-term value for clients.
IBD: What role has State Street played in the ETF industry’s relentless march toward lower costs?
Archard: Since democratizing access to broad market exposure with the launch of SPDR S&P 500 (SPY) nearly 25 years ago, we have continually looked for opportunities to make investing better.
Lower expense ratios are a very important component to this commitment, but it’s important to keep in mind that the total cost of ETF ownership is determined by more than a single data point.
Variables including bid/ask spreads and premiums/discounts are often just as important as expense ratios when determining costs.
That said, the median net expense ratio for our family of SPDR ETFs has long been significantly lower than the industry average, and we’re always looking for opportunities to build upon this competitive advantage.
IBD: What areas in ETFs are you targeting for growth — smart beta, actively managed ETFs, products for advisors such as managed portfolios?
Archard: All three areas represent an opportunity for growth for SPDR ETFs, and in many ways, recent trends in fixed income help underscore this opportunity.
The challenges of relying on the Bloomberg Barclays U.S. Aggregate Bond Index — known as the “Agg” — for core fixed-income exposure have been well documented.
Despite the Agg’s popularity, the index represents a relatively small portion of the $90 trillion global bond market.
However, with product development strides made in fixed-income ETFs over the last five years, investors no longer have to default to the Agg. Instead, they could look to actively manage their fixed-income beta strategies using a wide range of ETFs that provide access to all corners of the fixed-income markets or rely on a well-regarded active manager like DoubleLine to minimize risk during the path of interest rate normalization.
In just over two years since its launch, the SPDR DoubleLine Total Return Tactical ETF has attracted over $3.5 billion of assets while outperforming approximately 80% of its peers on a risk-adjusted basis.
Given these results, it would be hard not to be optimistic on the future of fixed-income ETFs.
IBD: What challenges face the ETF industry even as it undergoes rapid growth?
Archard: ETFs are now a $3 trillion market in the U.S. and currently represent about 30% of all exchange trading. Despite this tremendous success and growth, they remain misunderstood by wide swathes of the financial services universe.
Hardly a month goes by without someone trying to falsely assign blame on ETFs for an abnormality in the markets. While much of this criticism is being driven by those who are threatened by the rapid growth of ETFs, reactions to some of these criticisms suggest investor education could be the biggest challenge facing the ETF industry.
In our view, the more the industry does to increase investors’ knowledge and understanding of ETFs, the faster assets will grow.
IBD: Which ETFs in your lineup have been most popular this year?
Archard: Year-to-date, we have seen very strong demand for our SPDR EURO STOXX 50 (FEZ), which has attracted $1.5 billion of inflows amid some concern surrounding the valuations of U.S. stocks and very strong performance for eurozone stocks as the region’s economy continues to recover.
SPDR Blackstone/GSO Senior Loan ETF has also experienced strong inflows as investors look to generate additional income in this low-rate environment and guard against the negative effects of spread-widening.
And despite relatively low levels of market volatility, this has been another strong year for SPDR Gold Shares ETF. Year-to-date, GLD has attracted over $739 million, which can be attributed to a combination of safe-haven buying in response to heightened geopolitical tensions and strategic allocations with the price of gold on the rise.
IBD: Have investors become complacent about risk? And what’s your advice?
Archard: The current bull market is now the second-longest in history, but one would be hard-pressed to find investors who are currently overly exuberant or complacent. Based on my own interactions with clients, most investors are focused on protecting their downside risk, controlling costs and remaining diversified.
IBD: What are your best tips for choosing the right ETF?
Archard: A good starting point is determining how the ETF will help you achieve your asset-allocation goals. From there, knowing exactly what you own is as important to choosing the right ETF as it is to picking a stock or mutual fund.
For ETF investors, this means taking a close look at the underlying index — or investment strategy, if it’s an actively managed ETF — to ensure it aligns with your objectives and risk tolerance. Examining the fund provider to ensure the firm is experienced and has a solid reputation in the ETF marketplace. And, familiarizing yourself with the ETF’s structure to understand your total cost of ownership, as well as how closely it tracks its benchmark and trades on the exchanges.
IBD: How can State Street improve its ETF market share in the face of stiff industry competition?
Archard: Last year was the best year for inflows into SPDR ETFs since 2008, which has provided tremendous momentum for the business this year. To build on this success requires a relentless focus on making investing better for everyone.
Despite the approaching 25th anniversary of the SPDR S&P 500 ETF and the industry, ETFs are still in the early stages of growth, representing less than 5% of the total investable market.
As awareness and understanding of the benefits of the ETF structure improves, the industry’s growth rate will continue to defy expectations as assets grow exponentially.
To capitalize on this growth and improve the firm’s market share, we’ll continue to identify enhancements to the SPDR offering that provide the greatest value to investors. With trillions in assets under management across the organization, SSGA’s scale, global footprint and partnerships provide a unique opportunity to help clients succeed.
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View more information: https://www.investors.com/etfs-and-funds/etfs/state-street-views-future-as-etf-milestone-nears/