In an unexpected strategic shift, State Street Investment Management, a major player in the exchange-traded fund (ETF) industry, is poised to capitalize on a new ruling by the Securities and Exchange Commission (SEC). This rule, which allows fund companies to create ETF share classes of traditional mutual funds, is predicted to spur a wave of new ETFs on the market.
While many are gearing up for this, State Street plans a different approach. The firm, managing around $1.7 trillion in its SPDRs ETF family, including prominent funds like the S&P 500 ETF (SPY) and the largest gold ETF (GLD), intends to introduce mutual fund share classes of its ETF strategies into the vast U.S. retirement plan market, a sector traditionally closed to ETFs.
Anna Paglia, the chief business officer at State Street Investment Management, discussed this move on CNBC's 'ETF Edge.' Paglia highlighted the untapped potential of the $4 trillion retirement plan markets, such as 401(k) and 403(b) plans, where ETFs have yet to become core index fund options.
Despite some limitations, such as the minimal importance of tax-efficient trading and intraday valuation for tax-deferred retirement plans, State Street sees an opportunity. The firm believes its substantial asset base and low fees give it a competitive edge in offering attractive portfolio options for investors and retirement plan sponsors alike.
Paglia emphasized that their strength lies in their existing scale. "With $1.7 trillion in ETF assets, we can leverage our current scale to build a more compelling offering across share classes," she stated, adding that "The enemy of efficiency is fragmentation."
In an op-ed for Barron's, Paglia noted that even though tax efficiency, a key advantage of ETFs, cannot be replicated in retirement plans, the 'in-kind' flows in ETF management could offer lower costs and improved performance for retirement investors over time. This process allows ETF issuers to transfer securities directly, avoiding costly public market sales and reducing turnover and associated trading expenses – benefits applicable to all share classes.
Currently, State Street's most significant ETFs include the SPDR S&P 500 ETF Trust (SPY) with $698 billion in assets and a 0.0945% expense ratio, SPDR Gold Shares (GLD) with $132 billion in assets and a 0.40% expense ratio, along with others like the SPDR Portfolio S&P 500 ETF and Technology Select Sector SPDR Fund.
While Dimensional Fund Advisors' application pioneered the new SEC's ETF regulation, over 70 fund providers are poised to follow suit, with preparations underway as reported by the main fund industry trade group, the ICI. However, State Street's plans face delays due to the ongoing government shutdown, which has stalled further actions. Once resumed, the focus will be on identifying ETFs that can distinguish themselves in the competitive 401(k) market.