In this articleSPYSTTFollow your favorite stocksCREATE FREE ACCOUNTA recent decision by the Securities and Exchange Commission to begin allowing fund companies to create ETF share classes of traditional mutual funds is expected to lead to a flood of new ETFs on the market, but State Street’s fund management arm, State Street Investment Management, has other ideas.The ETF giant, which manages roughly $1.7 trillion in its SPDRs ETF family — including the oldest and most-widely traded S&P 500 exchange-traded fund, SPY, and the biggest gold ETF, GLD — sees the SEC greenlight as an opportunity to bring a new ETF challenge to the retirement plan market.It’s planning to adopt the SEC decision, in reverse, offering mutual fund share classes of its ETF strategies in the massive U.S. retirement plan market, which has typically been closed to ETFs.Anna Paglia, State Street Investment Management’s chief business officer, said on CNBC’s “ETF Edge” on Monday that retirement plan markets where ETFs have not to date been represented as core index fund options, including the 401(k) and 403(b) market, are an opportunity she estimated at a size of $4 trillion, and will be a focus.Some of the benefits of ETFs, such as more efficient tax trading, may not be important to investors in tax-deferred retirement plans. ETFs’ intraday valuation — they trade in real time throughout the day like stocks, as opposed to traditional mutual funds’ once-a-day valuation — has also been an issue for some plan sponsors. But the low fees and massive scale of State Street’s assets under management give it an advantage in offering investors and retirement plan sponsors competitive portfolio offerings.”We now have $1.7 trillion in ETF assets,” Paglia said, explaining that the company can use its existing scale to create a more competitive offering regardless of share class. “The enemy of efficiency is fragmentation,” Paglia said.In a Barron’s op-ed recently penned by Paglia to explain the company’s thinking, she noted that while the tax efficiency that attracts many investors to ETFs can’t be replicated in the retirement plan market, what are called the “in-kind flows” used in ETF management can lead to lower costs and better performance over time for retirement investors.”That is because when large institutions redeem ETF shares, ETFs aren’t forced to sell investments to raise cash like mutual funds. Instead, ETF issuers can transfer securities directly to these large institutions, typically market makers or broker-dealers, through ‘in-kind’ redemptions. By avoiding selling in the open market, this process helps lower turnover and associated trading costs in the underlying portfolio — efficiencies that benefit investors in all share classes,” Paglia wrote.State Street’s largest ETFsSPDR S&P 500 ETF Trust (SPY)Assets: $698 millionExpense ratio: 0.0945%SPDR Gold Shares (GLD)Assets: $132 millionExpense ratio: 0.40%State Street SPDR Portfolio S&P 500 ETF (SPYM)Assets: $95 millionExpense ratio: 0.02%Technology Select Sector SPDR Fund (XLK)Assets: $95 millionExpense ratio: 0.08%Financial Select Sector SPDR Fund (XLF)Assets: $52 millionExpense ratio: 0.08%Source: State StreetThe SEC recently began the greenlighting of ETF share classes of traditional mutual funds with an application from Dimensional Fund Advisors. The mutual fund industry is expected to move in droves to adopt this new ETF provision. More than 70 fund providers have applications pending and the ICI, the main fund industry trade group, recently told “ETF Edge” it has been working with hundreds of fund companies to be prepared to take advantage of the SEC exemptive relief.However, the current government shutdown has put a hold on any further actions, including State Street’s plans for ETFs to be made available as mutual funds in the retirement market. When State Street Investment Management is abl …
