State Street Global Advisors, the third-largest exchange-traded fund provider in the United States, is entering the actively managed exchange-traded fund space, but with a twist.
Unlike other major firms, the State Street Corp unit is not only going to sell its own funds, but also will distribute funds and partner with other asset managers that do not have the regulatory wherewithal to go it alone.
State Street minds assets for hundreds of fund companies globally, with a total of $21.8 trillion in assets under custody, according to the firm. Many managers for whom the firm acts as a custodian are interested in getting into the actively managed ETF space, but do not have approval from the Securities and Exchange Commission or the distribution platform to be able to do so, said Jim Ross, head of the unit's ETF business, in an interview with Reuters at IndexUniverse's Inside ETFs Conference on Monday.
"This allows us have a bigger presence in the active space and we have a broad platform to partner with firms that do not have the capability to do this themselves," Ross said.
By March, the Boston-based firm will roll out three active portfolios that invest in its ETFs. The three portfolios will be a real asset portfolio that invests in a range of physical assets, such as gold and other commodities, through its ETFs; a blended portfolio that invests in a number of its equity and fixed income ETFs; and a global "go anywhere" portfolio that can allocate across geographies and sectors.
Later in the year, State Street will come out with an actively managed bank loan ETF that will be managed by GSO Capital Partners, an alternative asset manager owned by Blackstone that specializes in leveraged loans.
State Street hopes to have a handful of partnerships with asset managers on active ETFs, while also continuing to introduce its own products, Ross said.
Many industry providers and observers believe that the emerging active ETF space will grow quickly in 2012 as firms like Fidelity Investments enter the field and bond giant Pacific Investment Management Co starts an ETF clone of its flagship $244 billion Total Return Fund.
Active ETFs have $5 billion in assets, compared to the entire ETF industry, which has just more than $1 trillion, according to Morningstar.
"The PIMCO product is going to be a real game changer," said Eric Pollackov, managing director, ETF capital markets at Charles Schwab. "This will push other actively managed ETF fund managers to push it farther."
For State Street, which has a very small presence in the active space, the move can help it get into a part of the ETF market that is expected to grow in the coming three to five years, said Tom Lydon, president of Global Trends Investments, a registered investment adviser.
While the firm had $212 billion in passively managed mutual fund and ETF assets as of the December 30, the firm only had $3 billion in actively mutual funds, according to Lipper.
"If you look at the index-based landscape, it is full," Lydon said. "In order to be competitive, this is where the growth is going to be over the next three to five years."
Still, even though State Street is launching active ETFs, Ross is not totally convinced that they are going to be hugely successful in the next three to five years or if it is going to take longer for investors to warm up to the idea. "But I do think we have to be in this market if we want to be a player in the ETF business," he said.
(Reporting By Jessica Toonkel; Editing by Jennifer Merritt, Chelsea Emery and Tim Dobbyn)