State Street Takes on Active ETFs with 3 New Funds

by JT on April 29, 2012

State Street Global Advisors, arguably the most influential player in the ETF space, announced the launch of three new actively-managed exchange-traded funds. Before the announcement, State Street sponsored only passive portfolio products.

Actively-Managed SPDRs

The actively-managed products rolled out this week are more than your average plain-vanilla ETF. The products are unique, touching on inflation protection, income, and global allocation.

Here are the three funds as announced:

    1. SPDR Global Allocation ETF (GAL) – The fund will look for immediate income and capital preservation before capital appreciation. A lower-risk fund, the Global Allocation ETF will invest in American and international stock and bond holdings, while actively-managing the portfolio to seek the highest possible yields on a risk-adjusted basis. This fund is very inexpensive for an international balanced ETF, charging management fees of only .35% per year.
    2. SPDR Multi-Asset Real Return ETF (RLY) – This fund will seek capital appreciation while protecting investors from inflation with income securities including real estate and commodities. The real return ETF follows other real return ETFs such as those from IndexIQ (IQ CPI Inflation Hedged ETF CPI) and WisdomTree (WisdomTree Global Real Return Fund RRF). The fund sells with an annual expense ratio of .7% per year, an amount higher than most index ETFs, but lower than actively-managed mutual funds.
    3. SPDR Income Allocation ETF (INKM) – This ETF will focus on a total return strategy from positive carry assets and income products including stocks, bonds, and preferred shares. The fund will also hold real estate investments in its portfolio. The fund differs from RLY in that it is primarily a global fund. This fund will also carry a .7% expense ratio.

The three funds will seek to find “value dislocations” in the market, where short-term trading events misprice the long-term fundamentals for any given security. The goal is to beat respective benchmarks by 2% per year, while keeping tracking error to 2-4% at any given time, according to executives at State Street.

Retirement Planning with ETFs

Exchange-traded fund assets are primarily from the institutional sector of the market, which finds the convenience of ETF products to be excellent for basic trading strategies. So far, retirement planning with exchange-traded funds is a concept that has yet to hit the mainstream – mutual fund assets tally to a sum worth more than $19 trillion, while ETF assets remain stagnant at just over $1 trillion of invested interest.

New actively-managed funds could allow institutional players like State Street to develop an edge in the retirement planning industry. So far, active ETF issues have been few – only 26 actively-managed ETFs existed before State Street’s announcement. Both iShares and PIMCO are both working on their own lines of active funds.

The difficulty for issuers is two-fold: institutional investors typically want index ETFs to implement their own management strategies, and the general public (retirement investors) still have limited access to active ETFs. Retirement plans, such as 401ks, 403bs and other similarly structured vehicles typically limit investors to a few mutual fund choices often all sponsored by the same company managing the 401k account, although the 401k annuity is gaining prominent attention of late. Those who have a broker window into ETFs (estimated to be 25% of people invested in 401ks) typically face higher transaction costs to buy and sell ETFs through a retirement account compared to an online discount broker.

ETFs Are the Future

Despite roadblocks, actively-managed funds like State Street’s newest funds are, in my view, the future for traditional retirement planning. Exchange-traded funds have much lower operating costs as “deposits” and “withdrawals” are handled by the open market, not the fund company. Additionally, the general trend in investment thinking tends to favor lower costs for investors. An actively-managed exchange-traded fund capable of accumulating large amounts of invested interest could easily compete with passive portfolio indexes on price.

Can improved strategies and falling management fees from exchange-traded fund operators make active investing attractive again?

Disclosure: No positions now or planned for the next 72 hours in any ETFs covered in this article.

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