State Street Global Advisors prepares for another ETF disruption

State Street Global Advisors may have filed the first application to launch an exchange-traded fund that would invest in illiquid, hard-to-value private assets, but Matteo Andreetto is focusing on faster ETF growth elsewhere.

SSGA’s head of intermediary client coverage, Europe, said ETFs are poised to disrupt the lucrative structured products industry globally, while launching branded fund ranges for major wealth managers is “high on my agenda” .

Andreetto’s outlook points to potential future conquests for the burgeoning ETF industry, which has quintupled in size over the past decade to $14 billion, undermining the once-mighty mutual fund industry in the process.

“ETFs are the most powerful innovation in financial services in the last 20-30 years. There is nothing that has been as disruptive as this,” said Andreetto, a 28-year industry veteran who also spent five years as head of SSGA’s SPDR ETF business in the Emea region.

It is now increasingly focused on the market for structured products – pre-packaged investments that use derivatives to try to achieve objectives such as income generation or principal protection – which have been criticized for complexity, opacity, illiquidity, high fees and counterparty risk.

They are typically issued by banks such as Barclays and JPMorgan, and Andreetto estimates annual issuance at $60-80 billion a year in each of the US and Europe.

The ETF industry has already made a dent in the structured product market in the form of buffered ETFs, which use derivatives to provide protection against downside, and have raised $35 billion in the U.S. alone, according to data from VettaFi.

Covered call or call/write ETFs, which sell some upside potential in exchange for income, have garnered even more.

However, Andreetto believed the ETF industry was “just scratching the surface.”

“There is very little in a structured note that cannot be packaged into an ETF. This is the next wave in terms of disruption. It is a very opaque market. It’s a big market,” he said.

Impersonating structured products may not be plain sailing, however. In Europe, for example, there are limits on the use of derivatives in the popular mutual fund structure used by most ETFs, Andreetto said.

Perhaps more importantly, structured products “have very high selling incentives attached to them,” he said, with intermediaries being financially rewarded for selling them, while ETFs offer no such payouts.

Another potential avenue for growth is the creation of ETFs in collaboration with the wealth management arms of the big banks, which control the distribution of funds across much of Europe.

“In Europe now I see big wealth managers wanting to have their own ETF range. They don’t have the infrastructure, but they want to have the products,” Andreetto said.

His proposed solution is for SSGA to create custom ETFs, which are then branded as the wealth manager’s.

“I think it’s going to be a massive trend in Europe. It’s at the top of my agenda in terms of things we’re looking at,” he said.

To some extent, the initiatives can be seen as an attempt to counter SSGA’s declining market share in an ETF industry it largely created.

Over the past five years, its market share has fallen from 12.7 percent to 11.5 percent (even as its assets have doubled to $1.5 billion), according to Morningstar data. During this time, iShares’ share of industry leader BlackRock fell faster, from 36.7% to 31.3%, but Vanguard continued and more competitors entered the market.

State Street is full of initiatives to fight back.

Late last year, SSGA cut the total expense ratio on the Ireland-domiciled SPDR S&P 500 Ucits ETF from 0.09% to 0.03%, making it the cheapest such vehicle in Europe and less than a third of the price of its $574 billion flagship SPDR. S&P 500 ETF Trust (SPY) in the US.

Since the discount, the ETF’s market share of net new money flowing into all Ucits S&P 500 ETFs has grown from less than 5 percent to 40 percent, Andreetto said.

Then, earlier this month, it debuted two ETFs in the US, the SPDR Galaxy Digital Asset Ecosystem ETF (DECO) and a less volatile hedged variant (HECO), which it claims are the first to include both cryptocurrencies (through the ETF- uri and futures) as well as shares. .

Most interest will focus on SSGA’s innovative proposal to launch an ETF to invest in private as well as public credit in conjunction with Apollo Global Management.

The burgeoning private equity market is seen by many as the biggest remaining green space for the ETF industry — if concerns about illiquidity and pricing can be resolved to the satisfaction of regulators and investors.

Under the SSGA/Apollo plan, Apollo would step in to make “firm offers” for any of the private loans the ETF would have to unload in the event of significant redemptions.

“Liquidity will always be provided by Apollo,” Andreetto said. “I think the solution is credible and robust.”

A possible concern relates to the risk of “adverse selection”, Apollo or any other lender having an incentive to keep the best quality loans they originate for their own funds (performance fee charging), leaving lower quality loans for ETFs.

Andreetto suggested it wouldn’t happen. “Wouldn’t it be detrimental to Apollo’s reputation to do that?” he asked.

As for what determines the price at which Apollo would buy, he didn’t want to be drawn in, though, noting only that “there are things that are not fully disclosed yet.”

Whether this ETF is approved or not, such relationships seem increasingly to be the way to go for SSGA.

“We don’t necessarily have (all) the investment exposures. We partner with other players,” Andreetto said. “The way we see our mission is to provide the tools to end investors. The future starts here.”