State Street Global Advisors expanded this week its collaboration with Russell Indexes by launching the market’s cheapest Russell 2000 ETF, ‘TWOK,’ and refitting three existing Dow Jones-linked funds to Russell benchmarks.
Jim Ross, the firm’s global head of SPDR ETFs, caught up with IndexUniverse’s Cinthia Murphy to talk about the rollout, as well as how State Street is positioned for the future, and whether the massive SPDR Gold Shares (GLD) redemptions are keeping him up at night.
IU.com:The SPDR Russell 2000 ETF (TWOK) is in many ways a “me-too” fund. Why tap into a segment that’s well covered by the likes of IWM?
James Ross: We look at this more as an opportunity to bring institutional quality indexes to the SPDR ETF lineup. We are bringing out a broad set of Russell indexes—not just the Russell 2000—to SPDR shareholders and potential SPDR shareholders. This was an opportunity to leverage the institutional-grade product-development skill of SSgA, along with institutional-quality indexes from Russell for the market place.
IU.com:TWOK came to market as the cheapest Russell 2000 ETF. Is cost something SSgA is looking at more closely these days?
Ross: We are always looking into making sure our SPDR ETF family is competitively priced, but this is not all about cost. We’ve talked a lot about this before. It’s about making sure we bring our investors a full value proposition to the SPDR ETF family.
Far beyond pricing, we believe in partnering up with our clients to ensure we have the right products for their investment objectives. We continue to reshape a variety of different products, and in an effort to make sure the products are right for the investor, we expect to continue to do that over time.
IU.com:State Street is the second-largest ETF provider, but do you worry at all that low-cost Vanguard is cutting closer in terms of asset gathering, and may be threatening that ranking soon?
Ross: I welcome the significant competition amongst ETF providers. It’s been there for a long time, and we welcome it. It’s actually good for the industry to have healthy competition; it’s good for investors, it’s fundamentally good for the overall growth of the ETF industry. It’s not something I worry about:I think it’s really positive for the end investor and for the ETF industry as a whole.
IU.com:How do you think State Street is positioned for the next phase of growth in the ETF market, which some say will be the distribution phase?
Ross: Competitively. We’re very careful about not making forward-looking statements, but I’m always looking to the continued development of the ETF market and to recent trends—such as active ETFs, which we’ve been sometimes a part of and sometimes a leader in.
We have what I call a consistent view of the marketplace and we believe in the future of ETFs in general. We will continue to look for ways to drive innovation and success rather than just driving the number of funds in our lineup.
IU.com:Back to ETFs, you switched indexes from Dow Jones to Russell benchmarks in three ETFs this week. Why make this an index change rather than fund closures? Is there a tax reason to do it this way?
Ross: If you close funds and open new ones, you would have a taxable event for shareholders leaving that fund, and to the extent that the indexes lined up pretty closely to the old indexes, it’s a lot more beneficial to existing shareholders to be transitioned to a new benchmark. We’ve seen other large providers do similar transitions in the past year. Anytime you can transition a fund to a new benchmark versus closing and opening something new, that’s better for shareholders.
From a Russell perspective, 72 percent of institutional investors use Russell indexes, so the scale and breadth of that utilization was attractive to us, and there are more than $4 trillion of assets benchmarked to Russell U.S. equity indexes.
IU.com:Is there something that has made this index transition easier to do now rather than, say, a few years ago? Why now?
Ross: We evaluate our lineup on an ongoing basis and look for any opportunity we can to identify new and improved ways to access the market. The Russell institutional heritage of their index family, along with a strong desire to offer institutional-grade ETFs to marketplace, really drove this decision.
IU.com:Is SSgA planning other Russell products or have any plan of phasing-out existing Dow Jones products?
Ross: I want to be very clear:This wasn’t anything done specifically to Dow Jones. Dow Jones and S'P are now one company, and we have a very broad relationship with S'P, and a broadening relationship with Russell. We have other Dow Jones products. This was simply an opportunity we saw to bring institutional-quality-type products to a broad array of investors, both institutional and retail.
IU.com:As a final thought, to touch on gold, has the extent of outflows in GLD so far this year—$ 18 billion—surprised you at all?
Ross: Great question. I think anytime you see a significant shift in performance, as we’ve seen in the performance of gold, you’d expect to see, in certain market conditions, outflows. When you look at that, and parallel that to the significant inflows for the eight years before that, it grew to the second-largest ETF for a long time; it became a sizable ETF.
I can’t say I anticipated the type of outflows we’ve seen this year, but we continue to work with GLD shareholders on the case for investing in gold, and we are making sure we reinforce the case that was there when they chose to invest in GLD. We’re there to help those who want to transition out of the product, but our main focus is making sure that any existing and future shareholders have a good understanding of the diversifying aspects of gold in an asset class.
There’s no question that, over the years, we’ve had investors who’ve made a strategic investment in GLD, and then because of their view on the marketplace, increased that with a tactical overlay, and now we’ve definitely seen some of those overlays come down as people are seeing other opportunities in the market.
Anytime you see a decline in an asset, you are going to have investors re-evaluate where that asset fits in their portfolio. We saw that in equities in 2008, and we are seeing that in fixed income. I see this as a natural evolution of any market and any asset class.
IU.com:Do you think those outflows have been helping drive gold's price lower?
Ross: We really don’t believe there’s any correlation between outflows of a specific ETF to the broader gold market. The broader gold market has so much liquidity and so much trading on a daily basis that outflows of $15 billion to $18 billion seem significant to us in the size of the fund, but in the overall gold market, they’re not as meaningful.
There have been times when we’ve seen significant inflows into GLD and significant price depreciation in gold. Historically, there’s not a traditional correlation between gold prices and inflows/outflows from an ETF.
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