Low Fees, Liquidity to Widen ETF Share: State Street

Low Fees, Liquidity to Widen ETF Share: State Street

Growth of active management is also helping ETFs take share from mutual funds, a report from the firm says.

Wealth Management Editor
Reviewed by: Mark Nacinovich
Edited by: Ron Day

On the 30-year anniversary of the first exchange traded fund, State Street Global Advisors sees plenty of upside ahead as low fees, active management and liquidity continue to drive the appeal of ETFs over mutual funds. 

Boston-based State Street, which in 1993 issued the first U.S. exchange-traded fund, the $424 billion SPDR S&P 500 ETF Trust (SPY), identifies key trends that will keep driving investors and financial advisors toward ETFs. 

The first is the ETF trademark: low fees. 

“In the face of uncertainty, investors are more sensitive to fund costs,” a report from State Street says. 

The second trend is active management, “offering both the potential benefit of security selection and ETF tax efficiency” that has helped active ETFs grow to $394 billion. 

Active ETFs still represent just 6% of the more than $7 trillion ETF market, but in 2022, active ETFs set a record with $106 billion worth of inflows. 

State Street’s report says that half of all ETF issuers are developing transparent active exchange-traded funds and another 25% are planning to develop them. 

Fixed-income ETFs have come into focus in an environment that has seen aggressive monetary policy essentially eliminate low-cost borrowing. With more opportunity to access yield, the ETF market has grown to 577 bond market ETFs. 

According to State Street’s research, equity ETFs make up 78.4% of all ETF assets, followed by bond ETFs at 19.5%, commodity ETFs at 1.7% and alternative strategy ETFs at 0.4%. 

ETF Market Drivers Remain Fees, Liquidity: State Street

Dividends are another area of opportunity, according to the report, which cites a need for both defensive and offensive investment strategies. “This has more investors turning to dividend payers, as they consistently return value to shareholders but aren’t as heavily allocated to defensive market segments and low volatility strategies,” the report says. 

Model portfolios, catering specifically to financial advisors “to give their clients tax-efficient access to institutional-caliber investment management,” are one more area for the industry to explore, the report says. 

At around $26 trillion, the mutual fund industry still wildly overshadows the ETF market, but the trends speak volumes. In October alone mutual funds experienced $80 billion worth of total net outflows while ETFs had $30 billion worth of inflows. 

“Over the past decade, U.S. equity ETF inflows have largely been at the expense of active mutual funds,” State Street reports. 

“We expect this trend to continue as we’re seeing a growing number of asset managers enter the ETF business for the first time,” the report continued. “And as more ETF providers and products enter the ETF market, we anticipate a continued focus on ETF liquidity and market qualitymaking for an optimal trading experience for ETF buyers and sellers.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter    

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.