© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Ignites, a Financial Times publication, provides news about the mutual fund industry in the US. http://www.ignites.com/
State Street Global Advisors has filed plans with the Securities and Exchange Commission to add three equity exchange traded funds to its suite of actively managed ETFs.
The firm is planning to launch the SPDR SSgA Risk Aware ETF, SPDR SSgA Large Cap Risk Aware ETF and SPDR Small Cap Risk Aware ETF, according to a registration statement filed last week. All three would select stocks to invest in based on “a proprietary quantitative investment process to measure and predict investor risk preferences.”
SSgA would select securities in the Russell 3000 index for the Risk Aware ETF, the Russell 1000 for the Large Cap Risk Aware ETF and the Russell 2000 for the Small Cap Risk Aware ETF.
SSgA broke into the active ETF space in April with three asset-allocation products that invest in a range of index-based SPDR ETFs. They are the SPDR SSgA Global Allocation ETF, the SPDR Multi-Asset Real Return ETF and the SPDR SSgA Income Allocation ETF. Another asset allocation active ETF is in registration — the SPDR Aggressive Global Allocation ETF — along with a bank loan active product to be subadvised by Blackstone.
But SSgA has yet to find substantial assets in the active space. Its three products hold just under $100m in assets combined. SSgA’s experience is just one example of the difficulties of getting active ETFs off the ground, sources say.
While Pimco’s Total Return ETF is the most popular ETF to hit the market in 2012, at $3.9bn in assets under management, the active market represents only 1 per cent of global ETF assets and 3 per cent of flows for the first 11 months of this year, according to BlackRock.
The slow growth of the equity side of the active ETF market in particular is driven by investor appetite as well as supply of products.
“You just haven’t had that many players dive in with full-on active equity ETFs. It’s the corner of the market that is the latest to the game,” says Robert Goldsborough, ETF analyst at Morningstar.
Furthermore, while equity ETFs have taken in nearly $105bn of the $172bn in total US ETF flows this year, the vast majority of those flows have gone into the largest broad-based index products, says Todd Rosenbluth, ETF analyst at S&P Capital IQ.
SSgA’s initial foray in the active equity ETF market appears to take an active approach to the popular low-volatility investment trend. When SSgA’s models predict a period of high risk, portfolio managers will tilt the funds’ portfolios toward more defensive sectors, large-caps and value-oriented companies.
Conversely, when the model predicts a period of low risk, the portfolios will seek out more growth-oriented or smaller-cap stocks. During periods of moderate risk, the portfolio composition of the funds will reflect the underlying weightings of their benchmark indices.
“Due to ongoing market fluctuations, the adviser believes the resulting ebbing and flowing of risk preferences give this strategy the potential to provide competitive returns,” relative to the benchmark index, the registration statement states.
By including “risk” in the name of the products, it is clear SSgA is looking to capitalise on the risk-averse nature of investors, Morningstar’s Mr Goldsborough says.
“I don’t know how active a specific manager’s hand is going to be, however,” he says. “Are they going to be picking individual stocks or are they going to be using a model?”
Like its other active ETFs, SSgA is planning to structure the ETFs as feeder funds into a master portfolio. In this structure, the ETF will invest substantially all of its assets in shares of a master fund with the same investment strategy.
While the ETF will be the only feeder fund to the master fund when it launches, the structure allows a provider to add additional feeder funds through other distribution channels in order to spread fund expenses across a wider asset base.
But the structure still requires daily transparency of the underlying holdings, a condition that has kept many truly active fund managers away from the ETF market, sources say.
Please don't cut articles from FT.com and redistribute by email or post to the web.