How State Street Could Reclaim the ETF Throne

State Street Global Advisors (SSGA), once the largest U.S. exchange-traded fund (ETF) provider in terms of market share and assets under management (AUM), would likely need to change its strategy to regain market share and claim the ETF throne. ETFs have grown immensely since SSGA launched the first ETF in 1993, but the company remained at the top of the ETF market in the U.S. until Vanguard and BlackRock surpassed it in 2015 and 2016, respectively. Now, BlackRock, Vanguard and State Street rank first, second and third in market share, respectively.

Here's a look at how the largest ETF players in the U.S. rose to the top and how SSGA might be able to regain market share. All information provided here was current as of Oct. 9, 2018. 

SSGA is the investment management arm of State Street Corp. (STT). SSGA launched the first ETF, called the Standard & Poor’s Depositary Receipts (SPDR) S&P 500 ETF (SPY), on Jan. 22, 1993. The fund tracks the performance of Standard & Poor's 500 Index (S&P 500), which is an index of the 500 largest publicly traded companies in the U.S. by market value.

SPY is still the world’s largest ETF and the world’s most heavily traded ETF, with total net assets that exceeded $278 billion. The average trading volume for SPY exceeds 967 million shares. In 1998, SSGA launched a family of sector-specific ETFs, collectively called the Sector SPDRs. The SPDR ETFs now hold more than $644 million in total AUM.

On Jan. 20, 2015, the Vanguard Group overtook SSGA to become the world’s second-largest ETF sponsor. Vanguard already enjoyed its status as the world’s largest mutual fund company. 

As an ETF sponsor, Vanguard established a reputation for providing a variety of low-cost ETFs, using a passive management strategy. Vanguard offers a number of ETFs with expense ratios of 0.10% or lower. Both its Vanguard S&P 500 ETF (VOO) and its Vanguard Total Stock Market ETF (VTI) have expense ratios of only 0.04%. Vanguard’s AUM for its ETF products exceeds $928 million.

In 1996, Barclays Global Investors launched the iShares ETFs. In June 2009, BlackRock Inc. (BLK) acquired Barclays Global Investors and the iShares ETFs from British financial services giant Barclays PLC (BCS). Now, BlackRock’s iShares is the largest ETF manager with AUM exceeding $1.47 billion.

The iShares Core ETFs use a unique marketing strategy that targets mutual fund investors with the cost advantages of the product line. The company emphasizes that iShares Core ETFs cost approximately one-tenth as much as a typical mutual fund. The iShares website offers an interactive platform for the investor to design a personalized portfolio of iShares Core ETFs. The iShares Core S&P Total U.S. Stock Market ETF (ITOT) has an expense ratio of only 0.03%.

SPDR ETFs are about $284 million behind Vanguard in terms of AUM. That means recapturing the second-place position would require more than a 30% asset boost. Even more daunting is that SPDR would have to more than double the AUM of its ETFs to recapture first place from BlackRock.

How can State Street possibly do this? One option is taking notice of what seems to be working for the smaller ETF sponsors as they increase their respective market shares. Both fourth-place Invesco (IVZ), with its PowerShares ETFs, and seventh-place WisdomTree (WETF) are placing a heavy emphasis on smart beta ETFs, or funds that are not weighted by market capitalization. Fifth-place ETF issuer Charles Schwab Corp. (SCHW) has been increasing its market share by challenging Vanguard in a battle to lower fees.

Although SSGA offers a number of smart beta SPDR ETFs, they fall under the following categories: income (dividends), multifactor and single-factor (mostly low volatility). The multifactor ETFs are based on MSCI indexes, only one of which is a U.S.-focused ETF: the SPDR MSCI USA StrategicFactors ETF (QUS). 

State Street could benefit from enlarging its footprint in the domestic smart beta ETF space. The company may want to take a closer look at the business model adopted by sixth-place First Trust Portfolios L.P. The company developed its own AlphaDEX smart beta methodology for a line of ETFs. Perhaps a line of smart beta SPDR Sector ETFs with lower fees than First Trust might get State Street back to second place. An interactive website, inviting prospective investors to create their own smart beta ETF portfolios, could also be a step toward challenging iShares for first place.