ETF Due Diligence Series: State Street

Morningstar is taking an in-depth look at some of the biggest ETF providers in the market. In the final week of the series, we look at State Street

Helaine Kang 1 August, 2019 | 8:40AM Hortense Bioy, CFA
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The growing popularity of exchange-traded funds means that investors now have tens of thousands of trackers to choose from. But where to start? Considerations including assets under management, tracking error, charges and the track record of the fund group. But with hundreds of ETF all promising to track the same market, picking a fund can seem an impossible task.

In a new series, Morningstar analysts take an in-depth look at some of the biggest ETF providers in the market. This week we investigate State Street.

SPDR ETFs, the ETF business of US-based asset manager State Street Global Advisors (SSGA), has been offering ETFs in Europe since 2001. After several years of limited growth, the European SPDR ETF business was relaunched in 2011. SSGA ranks the seventh in European ETF market with €31 billion in AUM as of May 2019.

SSGA has a thoroughbred pedigree when it comes to indexing, having launched the first-ever US-listed ETF, SPDR S&P 500, in 1993. Despite its strong presence in the US ETF market and handful of highly popular products in Europe, SPDR ETFs remains a relatively small player in the European ETF arena.

The real strength of SPDR's business is in the economies of scale gained from its relationship with the parent State Street Corporation, one of the largest custodians in the world. The firm's trading systems allow a large percentage of trades to be settled internally with other business areas globally, which allows for a reduction in trading costs. This close relationship also allows SPDR to leverage State Street's global technology expertise and risk-management systems.

Securities Lending and Stewardship

In fixed income, SSGA can leverage a solid infrastructure and heritage in the management and custody of bond portfolios. SSGA’s recent initiatives have been well-received by investors, including the launch of a wide range of sector-focused equity ETFs.

The securities-lending programme appears to be efficient and tightly controlled for risk. However, the decision to use State Street Securities Finance as the lending agent may lead to a conflict of interest.

Given its strong institutional heritage, SSGA boasts a solid investment stewardship programme. Compared with other US asset managers, SSGA demonstrates strong leadership on various ESG issues. The Stewardship team has been proactive in public campaigns to promote ESG issues (for example, Fearless Girl on gender diversity).

State Street is one of the better firms at reporting stewardship and engagement activities. It has been more transparent than many of its competitors. SSGA’s investment stewardship team has been in place since 2014. The stewardship team may collaborate with active portfolio managers to engage with companies on corporate governance issues.

ETF Range

The European SPDR range is entirely physically replicated and gives exposure to the two main asset classes: equity and fixed income. SPDR currently offers close to 100 ETFs.

Sector ETFs make up a large part of the SPDR equity product lineup and offer granularity, both in terms of individual sectors and geographical exposures (US, Europe, and world).

Equity ETFs employ full, sampled, or optimised physical replication and fixed-income ETFs employ full replication and stratified sampling.  The choice of method is underpinned on several factors, including the size of the portfolio, liquidity of the benchmark, custody costs, tracking error tolerance, and general availability of data.

SSGA has a limited exposure to securities lending with only 22 equity ETFs participating. The percentage out on-loan is capped at 70% of NAV. The gross revenue is split between the ETF and the lending agent, State Street Securities Finance, at a ratio of 75:25.

You can find the full report in "A Guided Tour of the European ETF Marketplace" here.

Read our analysis of: iShares, Lyxor, Vanguard, Invesco, UBSXtrackers, Amundi

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Helaine Kang  is a Passive Strategies Analyst, Morningstar Europe

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