Behind State Street’s Aggressive Fee Revamp

October 18, 2017

Nick GoodState Street Global Advisors made a dramatic move this week in the race to the bottom of ETF fees. It debuted the SPDR Portfolio ETFs, a lineup of 15 existing ETFs repackaged at much lower cost. These funds—three of which also had their underlying benchmarks replaced by in-house indices, and all of which got new tickers—are now some of the cheapest in their respective segments. They are also all offered commission-free at TD Ameritrade. Nick Good, co-head of the Global SPDR business, tells us why SSGA is shaking things up. What drove you to make this move and debut the SPDR Portfolio ETFs now?
Nick Good:
We've been looking at this for some time. Our clients have been asking us to do this; they wanted us in this space. They wanted more choice from a provider that wasn't going to compete with them. That's been a long-term strategic goal to be successful and be able to cover the whole of our clients' portfolios.

The issue we saw was, if you simply launched funds into this space, they wouldn't get traction. No one was going to buy a fund with no liquidity and no assets in it, even if cheaper. It was important to look for a partner who could help us in doing this, and the impetus really came from TD Ameritrade.

TDA wanted to relaunch and expand its commission-free platform, and we engaged with them to have SPDRs provide the core ultralow-cost offering at the center of the platform. The recognition that we could do this with existing funds so we wouldn't have to launch any new ones meant we had a credible offering on day one.

As we were doing this, we also said, “Look, if this is going to be a core approach, then we need to make these as effective as they can be for buy-and-hold investors.” We worked hard to get the cost as low as we can.

But we also changed the share price. The ETFs went to share splits, which means that all of these are about $30. And it's been surprising how positive that has been for us.

We also simplified the naming convention, so it’s much easier for someone who looks at these funds to know exactly what they are. You said clients wanted more choice from a provider that would not compete with them. Is that what drove the decision to join with TDA as opposed to, say, Schwab?

Good: The reason we chose TDA is because they wanted an open-source platform. They didn't want to have their own funds. They like the separation of issuer from distributor.

And it's a really strong platform. It's much more about the RIA support. We don't believe in going direct to consumer, that's not who we are. We believe the advisor is central. TDA feels the same.

But it's not just TDA advisors that have been asking for this. Whether it's Morgan Stanley or Merrill Lynch or independent broker-dealer advisors or other RIAs, across the board, we keep hearing the same message of "we want to do more business with SPDR; help make it easy for us to do that." That sort of impetus was really what drove all of this. The biggest cut was to the emerging market ETF, now the SPDR Portfolio Emerging Markets ETF (SPEM), which saw its fee cut some 80%. You're giving some of these ETFs away practically for free. Do you expect enough scale going forward to make up for the $11-plus million in fees you're giving up with this move? Or is the idea to bring investors in to other pricier ETFs?

Good: Each one of these ETFs is profitable at the current prices. We spent an awful lot of time and work getting into the underlying pieces of each one of these to really drive out as much cost as we can. It's not just the obvious stuff; it's getting into things like how the prospectuses are printed, that sort of thing. We can actually offer all of these profitably. And those cost savings actually offset the majority of those direct revenue losses.

Obviously we're doing this because we believe they can grow. And 62% of flows in the first half of the year went into low-cost ETFs that were aimed at the buy-and-hold investor. It's an important part of what we need to offer.


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