A Low-Cost ETF in a 401(k) Retirement Plan? Giant fund State Street says you may see something similar soon
The recent decision by the Securities and Exchange Commission to allow fund companies to create ETF share classes of traditional mutual funds is expected to lead to a flood of new ETFs in the market, but State StreetThe fund management arm, State Street Investment Management, has other ideas.
The ETF giant, which manages roughly $1.7 trillion in its family of ETF SPDRs — including the oldest and most traded S&P 500 exchange-traded fund, SPYand the largest gold ETF, GLD — sees the SEC green light as an opportunity to bring a new ETF challenge to the retirement plan market.
It plans to reverse the SEC’s ruling and offer the mutual fund classes of its ETF strategies in the massive U.S. pension plan market, which has typically been closed to ETFs.
Anna Paglia, chief trading officer at State Street Investment Management, said on CNBC’s “ETF Edge” on Monday that the retirement plan markets, where ETFs have not yet been represented as an option to key index funds, including the 401(k) and 403(b) markets, are what she estimated to be a $4 trillion opportunity and will be her focus.
Some of the benefits of ETFs, such as more tax-efficient trading, may not be important to investors in tax-deferred retirement plans. The intraday pricing of ETFs — they trade in real time throughout the day like stocks, as opposed to the traditional once-a-day pricing of mutual funds — has also been an issue for some plan sponsors. However, State Street’s low fees and huge scale of assets under management give it an edge in offering competitive deals to investors and pension plan sponsors.
“We now have $1.7 trillion in ETF assets,” Paglia said, explaining that the company can use its existing scale to create a more competitive offering regardless of share class. “The enemy of efficiency is fragmentation,” Paglia said.
In a Barron’s op-ed recently written by Paglia to explain the company’s thinking, she noted that while the tax efficiency that attracts many ETF investors can’t be replicated in the retirement plan market, the so-called “natural flows” used in ETF management can lead to lower costs and better performance over time for retirement investors.
“That’s because when large institutions cash out ETF shares, ETFs aren’t forced to sell investments to raise cash like mutual funds. Instead, ETF issuers can transfer securities directly to those large institutions, usually market makers or broker-dealers, through ‘in-kind’ repurchases. By avoiding open market sales, this process helps reduce turnover and associated trading costs across all underlying share classes, from resulting in benefits for investors.
The largest ETF on State Street
- SPDR S&P 500 ETF Trust (SPY)
Assets: $698 billion
Expense ratio: 0.0945% - SPDR Gold Shares (GLD)
Assets: $132 billion
Expense ratio: 0.40% - State Street SPDR Portfolio S&P 500 ETF (SLEEP)
Assets: $95 billion
Expense ratio: 0.02% - Select Sector SPDR Fund (XLK)
Net worth: $95 billion
Expense ratio: 0.08% - Select Sector SPDR Fund (XLF)
Net worth: $52 billion
Expense ratio: 0.08%
Source: State Street
The SEC recently began illuminating traditional mutual fund ETF share classes with Dimensional Fund Advisors. The mutual fund industry is expected to move in droves to adopt this new ETF provision. More than 70 fund providers have applications pending, and ICI, the fund industry’s main trade group, recently told “ETF Edge” that it is working with hundreds of funds to be ready to take advantage of the SEC exemption.
But the current government shutdown has stalled any further action, including State Street’s plans for ETFs to be made available as mutual funds in the pension market. When State Street Investment Management can move forward, the question will be which ETFs in particular can gain traction in the 401(k) market. While greater trading and cost efficiency can be achieved by trading more than one share class, many of the key strategies in the ETF line are already offered by State Street to retirement investors in traditional fund portfolio stocks.
And in the asset management industry, where ETFs and index funds from giants such as Fidelity Investments and Vanguard Group have driven fees to literally zero, economies of scale across portfolios are already essential to competing for investors’ assets. Fidelity already offers four zero-fee core index mutual funds. The expense ratio of Vanguard’s Record S&P 500 ETF (VOO), which set an all-time high in annual flows for the ETF, is three basis points (0.03%). State Street’s SPYM, the new version of SPY, has an expense ratio of two basis points (0.02%).
But ETFs have become a way for many investors to access any kind of market strategy, from major stocks to thematic stocks to increasingly narrow parts of the bond market, as well as alternatives including precious metals and cryptocurrencies.
“Mutual funds are a way for ETF-oriented companies to … meet investors where they are,” Todd Rosenbluth, head of research at VettaFi, said of the “ETF Edge.”
He noted that State Street is not the only asset manager planning to create mutual fund ETF classes, with F/M Investments planning a similar approach to benefit from the SEC ruling.
Making the world’s largest gold fund available at potentially lower costs in 401(k) plans comes at a time when many more investors are adding gold as a larger allocation to traditional portfolios, often at the expense of bond funds. But given the low-cost stock and bond options available across major fund companies and pension plan providers, Rosenbluth said State Street’s biggest opportunities to excel in the 401(k) market at the individual portfolio level beyond GLD may be in select sector SPDRs like XLK and XLF and newer alternative ETFs it has launched like SPDR Bridgewater ALL Weather retail and SPDRIGSS Credit ( ALL Weather retail and SPDRIGSS ) investors to portfolio strategies that are typically only available to institutional investors.
ALLW, a global multi-asset allocation fund, includes Bridgewater Associates, billionaire Ray Dalio’s hedge fund manager, as a subadvisor. PRIV was the first ETF with significant private credit exposure approved by the SEC, though not without some controversy.
Paglia described the plans as less about marketing any particular strategy and more about creating a structure for State Street’s fund business that can bring the best of the ETF structure to multiple markets. “ETF technology is the most efficient technology in this market, but ETF technology is not the right envelope for everybody,” Paglia said on CNBC’s “ETF Edge.”
“In my view, the pension industry is not benefiting from the innovation that the ETF industry is bringing to the market and benefiting from,” she added.
To be sure, State Street is already a huge player in the superannuation market, third overall in assets under management in “defined contribution investment only” assets (those collected through other third-party managed superannuation platforms). State Street does not have its own defined contribution recordkeeping business similar to those offered by Fidelity, Vanguard and Empower. But in assets across strategies across retirement plans, State Street is behind only Vanguard and BlackRock (which runs the iShares ETF family), with more than $800 billion and 19% annual growth in 2024, according to Cerulli Associates.
State Street has historically had more collective investment offerings than traditional mutual funds for the retirement market, and depending on ETF strategies that align with mutual funds, there is an opportunity for growth in the small and mid-market plan segments that have historically had limited access to CITs because of their size, according to Cerulli.
The fragmentation Paglia cites stems from the fact that there are many legal wrappers for portfolio strategies used across pension plans, including collective investment trusts, target date funds, mutual funds and ETFs.
“My IRA is invested in ETFs, but my 401(k) plan is not,” she said. “It’s not a conversation about ETFs vs. mutual funds,” Paglia said. But she added that when the SEC allows asset managers to hold different share classes after the government reopens, State Street can take advantage of the size and scope of its ETF business. “We have strength of scale,” she said. “We also have the power of content because we have hundreds of strategies. … and once you combine content and cost, you have something that investors can ultimately benefit from.”
Correction: An earlier version of this article contained incorrect data under management for the best State Street SPDR ETF due to an editing error.