State Street celebrates growth in ETF industry

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Frank Koudelka headshot ETF

Dominating the service provider awards with three wins for ETF administration (best overall and best equities) and best custody, State Street Corporation also dominates the US ETF industry.

The firm is set to increase that domination with its latest news of the purchase of Brown Brothers Harriman Investor Services business, which will add USD5.4 trillion in assets under custody to State Street’s USD31.9 trillion.

Frank Koudelka (pictured), Global ETF Product Specialist at State Street Corporation, believes that the firm’s strength comes from its range of services and the way that the firm thinks about the ETF market, and the way it plans ahead.

“In 2021, the growth has been unbelievable,” Koudelka says. “We are seeing flows into the ETF wrapper doubling from the record flows experienced in 2020.”

The biggest trend in 2021 has been onboarding new active managers who have been inspired by the ETF rule, 6c-11, which made it much easier, cheaper and faster to launch ETFs, and the recent approval of semi-transparent ETF products, which protect an investment manager’s intellectual property.

“We have had an influx of active managers entering the ETF market,” he says. “We take a lot of pride in deploying our project management, product and operational specialists to educate the new entrants regarding what makes this marketplace different and introducing them to the ETF eco-system.”

ETF conversions from mutual funds have been a key theme in the US industry over the year, bringing huge new assets to the sector. Koudelka observes that what is coming through now is a stream of more strategic conversions, with smaller funds with more closely held assets, converting.

“Most fund managers don’t want to disrupt their investors or their distribution channels but want to be able to offer more choice,” he says.

Next year will see the expiration of the share class patent which will theoretically allow asset managers to bring scale and track record for new ETFs and Koudelka believes that more managers are interested in this approach than forcing investors to go through a conversion.

Another key theme during 2021 has been digital assets which are still not allowed in the US but north of the border, in Canada, and across Europe and Asia is emerging as a key trend.

“Active management generally has been a key theme throughout the year with close to two-thirds of all launches,” Koudelka says. “It remains the untapped area of the ETF market overall and semi-transparent strategies will see further growth once the regulator expands asset class beyond domestic equities.”

He also comments on the explosive growth of thematic ETFs, including the huge success of disruptive innovation strategies by ARK, and the growth of ESG investing, which has seen huge growth in the Europe, with the US market beginning to join the trend toward ESG-focused investing.

“We have an end-to-end service model,” Koudelka says. “It is a significant differentiator for us as it gives us the ability to work with clients from the front office to the back office. We have invested significantly to integrate via our Alpha for ETF capabilities and our tools are second to none as we continue to invest in our ETF technology and its global capabilities.”

“We think we have the best people in the industry and we take seriously our leadership role as we continue to educate the marketplace on key trends. This includes thought leadership papers, podcasts and education that includes participation on webinars, conference panels and industry forums.” 

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