Key Takeaways
- • State Street Investment Management plans to offer mutual fund share classes of its ETF strategies in the 401(k) and 403(b) retirement market, which Anna Paglia, its chief business officer, estimated at roughly $4 trillion in size, according to CNBC's "ETF Edge."
- • The plan follows an SEC decision allowing fund companies to create ETF share classes of traditional mutual funds, an application first greenlit for Dimensional Fund Advisors, with more than 70 fund providers reportedly having applications pending.
- • State Street's implementation is on hold because of the ongoing government shutdown, which has halted further SEC actions.
- • State Street is already third overall in "defined contribution investment only" assets and trails only Vanguard and BlackRock in strategy assets across retirement plans, with over $800 billion and 19% annual growth in 2024, per Cerulli Associates.
- • Paglia argued the retirement industry is not benefiting from ETF innovation, citing in-kind redemptions as a source of lower turnover and trading costs that could benefit retirement investors.
Summary
State Street Investment Management, the asset management arm of State Street, which manages roughly $1.7 trillion in SPDR ETF assets, is positioning to bring ETF strategies into the U.S. retirement plan market, which has historically been largely closed to ETFs. Following a recent SEC decision that allows fund companies to create ETF share classes of traditional mutual funds, State Street plans to offer mutual fund share classes of its ETF strategies to 401(k) and 403(b) plans. Anna Paglia, the firm's chief business officer, said on CNBC's "ETF Edge" that this retirement plan market represents an opportunity she estimated at $4 trillion.
Paglia has argued that while the tax efficiency that draws many investors to ETFs has little value inside tax-deferred accounts, the in-kind redemption process used in ETF management can lower portfolio turnover and trading costs, benefiting retirement investors in all share classes. In a Barron's op-ed, she wrote that ETFs can transfer securities directly to large institutions, typically market makers or broker-dealers, rather than selling holdings in the open market. She also described intraday valuation, which has been a concern for some plan sponsors, and said State Street's low fees and scale give it a competitive advantage. "The enemy of efficiency is fragmentation," Paglia said.
The SEC recently began approving ETF share classes, starting with an application from Dimensional Fund Advisors, and more than 70 fund providers have applications pending, according to the report. The Investment Company Institute has reportedly worked with hundreds of fund companies to prepare. However, the current government shutdown has delayed further action, including State Street's retirement plans.
State Street already has a significant retirement presence. According to Cerulli Associates, it ranks third in "defined contribution investment only" assets and is behind only Vanguard and BlackRock in assets within strategies across retirement plans, with over $800 billion and 19% annual growth in 2024. The firm does not operate a defined contribution recordkeeping business like Fidelity, Vanguard, or Empower. VettaFi's Todd Rosenbluth noted that State Street's best opportunities to stand out at the portfolio level may lie in its Select Sector SPDRs, XLK and XLF, and alternative ETFs such as SPDR Bridgewater ALL Weather ETF (ALLW) and SPDR SSGA IG Public & Private Credit ETF (PRIV). Competition is intense, with Fidelity offering four zero-fee core index mutual funds and Vanguard's VOO carrying a 0.03% expense ratio, while State Street's SPYM has a 0.02% expense ratio.
Paglia has argued that while the tax efficiency that draws many investors to ETFs has little value inside tax-deferred accounts, the in-kind redemption process used in ETF management can lower portfolio turnover and trading costs, benefiting retirement investors in all share classes. In a Barron's op-ed, she wrote that ETFs can transfer securities directly to large institutions, typically market makers or broker-dealers, rather than selling holdings in the open market. She also described intraday valuation, which has been a concern for some plan sponsors, and said State Street's low fees and scale give it a competitive advantage. "The enemy of efficiency is fragmentation," Paglia said.
The SEC recently began approving ETF share classes, starting with an application from Dimensional Fund Advisors, and more than 70 fund providers have applications pending, according to the report. The Investment Company Institute has reportedly worked with hundreds of fund companies to prepare. However, the current government shutdown has delayed further action, including State Street's retirement plans.
State Street already has a significant retirement presence. According to Cerulli Associates, it ranks third in "defined contribution investment only" assets and is behind only Vanguard and BlackRock in assets within strategies across retirement plans, with over $800 billion and 19% annual growth in 2024. The firm does not operate a defined contribution recordkeeping business like Fidelity, Vanguard, or Empower. VettaFi's Todd Rosenbluth noted that State Street's best opportunities to stand out at the portfolio level may lie in its Select Sector SPDRs, XLK and XLF, and alternative ETFs such as SPDR Bridgewater ALL Weather ETF (ALLW) and SPDR SSGA IG Public & Private Credit ETF (PRIV). Competition is intense, with Fidelity offering four zero-fee core index mutual funds and Vanguard's VOO carrying a 0.03% expense ratio, while State Street's SPYM has a 0.02% expense ratio.
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