October 3, 2013

ETF Inventor Looks to Future With Active Management

State Street, creator of the 20-year-old SPDR, works with advisors on portfolio construction combining ETFs and mutual funds

The SPDR Gold Shares ETF won an award in the precious metals category. (Photo: AP) The SPDR Gold Shares ETF won an award in the precious metals category. (Photo: AP)

As the exchange-traded fund industry matures, the company that invented the ETF, State Street Global Advisors, is looking to the future with more active management as well as portfolio construction that combines ETFs with mutual funds.

State Street’s first ETF, the SPDR (SPY) pegged to the S&P 500 equity index, marked its 20th anniversary this year, and in the last two decades the ETF universe has grown into a vast marketplace that offers advisors many options for building client portfolios, according to David Mazza, State Street’s head of ETF investment strategy.

“We focus a significant amount of resources on the advisor community,” Mazza said Thursday at the Morningstar ETF Conference in Chicago, where State Street won nine awards in forty categories. (SPY was not one of the winners, but SPDR Gold Shares (GLD) won in the precious metals category.)

Active management has become a focus for State Street as the firm’s ETF investment strategists work with advisors who are seeking income-producing portfolios yet are concerned about interest rate risk. The firm is finding solutions that combine both ETFs and mutual funds in client portfolios, Mazza said.

“For many years there seemed to be difficulty understanding how to use a passive ETF that trades all day versus an actively managed mutual fund that prices at its end-of-day net asset value,” Mazza said. “What we’re seeing as the ETF marketplace has evolved is many more offerings across asset classes. Advisors now view ETFs as a cost-efficient, liquid and transparent vehicle and not just a passive solution.”

For example, he said, advisors can pair alternative long/short go-anywhere mutual funds with three or four SPDR ETFs that focus on shorter-duration exposure, such as short-term corporate bonds, short-term high yield and bank loans. These include the following ETFs:

1)    Passive SPDR Barclays Short Term Corporate Bond (SCPB)

2)    Passive SPDR Barclays Short Term High Yield Bond (SJNK)

3)    Actively managed SPDR Blackstone/GSO Senior Loan ETF (SRLN)

State Street SPDR ETFs now comprise 122 funds in the U.S. and $340 billion in assets under management. This year, State Street has seen eight of its ETFs each gain more than $1 billion in net inflows, and two of those are SCPB and SJNK, Mazza said.

He wasn’t too concerned that none of those three funds were winners in the Morningstar 2013 ETF awards.

“Advisors are focused on not just the best-known ETF in a particular category, but the one that will meet the particular need of that client and their particular portfolio and financial goals,” Mazza said.

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Check out Vanguard’s Davis: Persistent Level of U.S. Debt ‘Biggest Issue of Our Lifetime’ on ThinkAdvisor.

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