NEW YORK - Although the summer has only just begun, it was "Back to School" last week here at a State Street Global Advisors (SSgA) seminar for financial advisers, on the finer points of exchange-traded funds.
The ETF marketplace, now with more than $640 billion in assets, may still represent a mere fraction of the $12 trillion in mutual funds. But in April, according to data from the Investment Company Institute, ETF assets totaled $596 billion, up a substantial 28% from $467 billion in April 2007. Meanwhile, assets in all types of mutual funds grew a respectable, but considerably smaller, 7% throughout all of 2007.
SSgA is the father of ETFs, as the mastermind behind the industry's first Standard & Poor's 500 tracking ETF (known as the "Spider" for its SPDR symbol) in 1993. The SPDR is the most liquid and frequently traded ETF with between $22 billion and $38 billion of its shares trading per day, SSgA officials said.
SSgA is the second-largest ETF provider as of April, with a 23.1% market share, up from 21.5% last year, according to Barclays Global, which is the top provider. Barclays has bragging rights to more than one-half, 52.8%, of the exchange-traded product market which includes its pioneering iPath-brand exchange-traded notes that first debuted two years ago this month.
Together, the two firms have locked up more than three-quarters of the marketplace (see accompanying pie chart).
Just three weeks ago SSgA, the $2.2 trillion investment management arm of State Street Corp. both of Boston, launched a broad educational initiative for financial intermediaries under the SPDR University banner name. The efforts include a specially enhanced website, www.spdru.com, chock full of data, educational materials and proprietary research on ETFs and other exchange-traded products, as well as practice management and portfolio strategies. The in-person meeting in Manhattan last week was part and parcel of the firm's hopes of reaching out to and better educating advisers and making ETFs that much more successful.
The most recent research of 840 financial advisers, co-sponsored by SSgA and The Wharton School of the University of Pennsylvania, shows that 67% of respondents believe that the ETF is the most innovative investment to have emerged over the past two decades.
The bear market of 2000-2003 actually provided the ideal environment within which the ETF market could grow, recalled Anthony Rochte, senior managing director, intermediary business, at SSgA. Many of the advisers within the fee-only universe got the joke right away and were among the first to embrace ETFs, he added, alluding to the fact that ETFs have remained as popular in down markets as in ascending ones. With a single trade, investors can buy into a bull market fund, or either a positive slice or a bear market ETF.
ETFs have changed the landscape of the fund world in much the way "digital photography has changed the way we take pictures," said Tom Lydon, president of Global Trends Investment. Amid the ferocious bear market early in the decade, the mutual fund hanky-panky disclosed in 2003-205, and given the fact that 80% of mutual fund managers don't outperform their benchmarks, "ETFs have given the industry a shot in the arm," Lydon said. "I think we will look back at the financial services industry and say ETFs had an aha' moment."
The fact is that more and more advisers as well as investors are turning to ETFs as their investment solution of choice. "A lot of the use of ETFs is replacing single stock picking," said Cliff Weber, executive vice president of development and strategy at the American Stock Exchange.
Moreover, what has truly leveled the playing field between mutual funds and ETFs is the fact that ETFs don't have concerns over various share classes and differential pricing. "I think one of the best features of ETFs is that everyone pays the same price; there are no separate share classes," said Jim Ross, senior managing director, intermediary business, at SSgA.
The ETF industry has moved into its second phase now. "We've moved past the initial land grab," Lydon said. "Now there is a lot more thought that goes into creating products. We are past the shotgun phase and are now into the rifle phase."
That is borne out by sheer data from Wachovia Securities' closed-end fund and ETF products analyst Marianna Bush, who also spoke at the SSgA event. The number of all exchange-traded products, which includes exchange-traded notes, grantor trusts and other forms of exchange-traded products, tripled between 2005 and 2006 and increased 72% from 2006 to 2007. But year-to-date 2008, the number of exchange-traded products available has fallen by 9%.
The SSgA survey also revealed that nearly half, 48%, of the advisers polled said that their single greatest product concern centers on ETFs that track to generally unknown indexes or untested portfolio methodologies.
That will likely mean that advisers and investors (the majority of whom are large institutional investors such as foundations versus small, self-directed investors) will take to the sidelines and watch an unknown index's parallel ETF for a few years to see how it performs.
That may be especially true for the new generation of actively managed ETFs that have very recently emerged, panelists at this event agreed.
SSgA has filed for, and is awaiting regulatory approval for, its very own actively managed Target Date ETF, Rochte revealed. But so far, the first generation of actively managed ETFs haven't seen spectacular results.
"The current actively managed, fully transparent ETFs that are out there have not delivered on the promise," commented SSgA's Ross. "Full transparency, I think, is a huge barrier. There are good reasons for not disclosing."
What's more, hedge fund managers, who today represent 30% to 50% of ETF trades, don't want to utilize actively managed ETFs, Lydon added. And other advisers will likely wait to see if these actively managed ETFs can deliver alpha and outperform their benchmarks, he concluded.
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