State Street is the longest serving service provider for ETFs, having launched the first ever ETF in 1993, the SPDR, based initially on the S&P 500, which is still the largest and most liquid security in the world.
Frank Koudelka (pictured), Senior Vice President – ETF Product Specialist at State Street Global Services, says: “We have seen a lot of change since then, from the first domestic equity-based cap-weighted product to all asset classes and smart beta and actively managed ETFs.”
While ETFs in North America started as an institutional phenomenon, Koudelka reflects that they are now used by retail investors and advisers.
“They were created for institutions but became something that is enjoyed by every type of investor,” he says. “That has driven the growth in the US and will lead to more growth around the world, as investors see the ability to invest in a low cost, transparent vehicle.”
The biggest challenge for a fund administrator in the ETF sector is in achieving an automated and integrated capability, Koudelka believes.
“You start with the base services,” he says, “And then with ETFs, there is a need to create a daily trading basket and the way we do it is integrating to our core platforms so that all the data is the same that is used for fund accounting, custody and administration for the fund.
“All the information is flowing in an automated fashion to our ETF platform which allows us to create trading baskets timely and accurately for the marketplace.
As we continue to get into more challenging asset classes, the ability to automate the data that is needed to price the funds and ensure that it is tracking closely to the benchmark is more and more of a challenge and as a result we are continuously updating our technology to be state-of-the-art.”
Market volatility, such as that seen on August 24th of 2015, requires State Street to ensure that the data that the market receives is accurate and timely for all of its clients.
Looking forward, Koudelka expects to see growth in actively-managed ETFs. “ETFs allow end investors a better mouse trap. The in-kind delivery feature allows ETF sponsors, through institutional market makers, to build portfolios in a more cost effective way. Additionally, the intra-day liquidity, lower cost structure and tax efficiency provides tangible benefits to investors,” he says.
“We haven’t seen a lot of growth yet, but we believe actively-managed ETFs will enable investment managers to bring their strategies to market. Limited disclosure ETFs are gaining momentum for regulatory approval and these structures allow mutual fund manager to offer their strategies in an ETF-wrapper, while masking some of the holdings, mitigate to the front-running or free-riding of their investment strategies.”
Koudelka has also seen some new innovation with liquid alternatives. “They are presented within an ETF wrapper,” he says. “This market segment is small today, but as the market continues to mature you will see more alternative strategies offered as ETFs.
