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State Street’s Koudelka celebrates exciting year

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“It’s been an exciting year, with the big trend we’ve observed has been more active managers coming into the ETF market, and we have been on the positive side of many of these launches,” says Frank Koudelka, global ETF product specialist at State Street.

“It’s been an exciting next phase of ETF growth that I’ve been describing as ETF 3.0 – passive ETFs were ETF 1.0, smart beta were ETF 2.0 and active is the current phase, expanding the pie and allowing active managers to leverage the benefits of the ETF wrapper.”

The demand for active ETFs is a reflection of what is happening in the market, Koudelka says. “The investment wrapper has shown that even if performance is positive, many mutual fund managers continue to struggle with outflows. The ETF can repair some of the inefficiencies of the mutual fund wrapper through its tax efficiency and lower costs to operate. These levers enable ETF issuers to improve performance and drive inflows.

“The macro market conditions has caused certain investors to move to cash, waiting for the next inflexion point – but this has primarily impacted active mutual funds that have seen severe outflows. Conversely, ETFs are seeing inflows, this year around USD700-800 billion, compared with last year’s USD1.3 trillion, so nothing to sneeze at. More outflows from mutual funds into ETFs continues to be the trend and it’s not purely a passive/active phenomenon, as active is seeing inflows.”

State Street leads the ETF industry, with 50 per cent of the global ETF market for assets under custody and administration. “Scale helps us to bring industry best practice to our clients,” Koudelka says. “We are the global custodian for ETFs in 14 different domiciles and we can build innovation to our technology as we see trends occurring in one market and have it available in all of them.

“We have developed State Street Alpha for ETFs which connects our front, middle and back platforms and since the acquisition of Charles River Development we have created seamless integration providing our Alpha clients with the efficiencies of straight-through processing. In the ETF pivot of passive to active, it’s even more important to understand available cash raised through trading in a more real-time manner. It’s a game changer.

“We are now seeing the fruits of it as a key differentiator as clients can see the technology integration creating efficiencies for managing their portfolios.”

The firm has also invested significantly in its order taking platform – Fund Connect, which is globalised and allows real time processing via APIs. There are currently 85 authorised participants and 50 clients on the platform globally.
Koudelka notes that the semi-transparent fund hasn’t taken off as fast as was forecast – the challenge has been that it hasn’t been approved beyond domestic equity and that the big distribution platforms haven’t quickly adopted the structures on their platforms, but remains bullish for the models for the future.

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