The Securities and Exchange Commission's (SEC) recent decision to allow fund companies to form ETF share classes of traditional mutual funds is set to catalyze a surge of new ETFs entering the market. However, State Street's fund management division, State Street Investment Management, has a different plan in mind.
As a major player in the ETF sector, managing approximately $1.7 trillion in the SPDRs ETF family — which includes prominent ETFs such as the S&P 500 ETF (SPY) and the GLD gold ETF — State Street views the SEC's approval as a gateway to bring ETF competitiveness to the retirement plan market.
Instead of following the trend of creating ETFs from mutual funds, State Street intends to do the reverse: offer mutual fund share classes of its ETF strategies for the vast U.S. retirement plan market, which is predominantly closed to ETFs.
Anna Paglia, chief business officer of State Street Investment Management, highlighted on CNBC's 'ETF Edge' that retirement plan markets have yet to incorporate ETFs as core index fund options. She sees significant potential in the $4 trillion market that includes 401(k) and 403(b) plans.
While some advantages of ETFs, like tax trading efficiency, may not be a priority for investors in tax-deferred retirement plans, their real-time intraday valuation — unlike mutual funds that value once daily — has posed challenges for some plan sponsors. However, State Street's substantial asset scale and low fees position it to offer highly competitive portfolio options.
Paglia emphasized, "We now have $1.7 trillion in ETF assets," and explained that the company's existing scale could lead to more competitive offerings across share classes. She further remarked, "The enemy of efficiency is fragmentation."
In a recent op-ed for Barron's, Paglia noted that while the tax efficiencies attracting many to ETFs cannot be replicated directly in retirement markets, 'in-kind flows' used in ETF management can reduce costs and enhance performance over time for retirement investors. She explained that large institutions redeeming ETF shares aren't compelled to sell investments for cash as mutual funds do; they can instead transfer securities directly via 'in-kind' redemptions, minimizing turnover and trading costs.
Below are some of State Street's largest ETFs:
- SPDR S&P 500 ETF Trust (SPY): Assets: $698 billion, Expense ratio: 0.0945%
- SPDR Gold Shares (GLD): Assets: $132 billion, Expense ratio: 0.40%
- SPDR Portfolio S&P 500 ETF (SPYM): Assets: $95 billion, Expense ratio: 0.02%
- Technology Select Sector SPDR Fund (XLK): Assets: $95 billion, Expense ratio: 0.08%
- Financial Select Sector SPDR Fund (XLF): Assets: $52 billion, Expense ratio: 0.08%
With the SEC recently beginning to greenlight ETF share classes from mutual funds, the industry is poised for a transformation with over 70 fund providers' applications pending. The Investment Company Institute (ICI), a leading fund industry trade group, has indicated that preparations are underway for many fund companies to leverage this SEC exemptive relief.
However, progress on these developments, including State Street's plans, is currently stalled due to the ongoing government shutdown. Once operations resume, State Street will face the task of identifying which ETFs can particularly excel in the 401(k) market when made available as mutual funds.