From alternative investment to portfolio essential

A Q&A with Jim Ross on the remarkable history of the ETF

Jim Ross is an executive vice president of State Street Global Advisors and chairman of Global SPDR. In these roles, he is responsible for leading engagement with ETF stakeholders including regulators, mutual fund and ETF boards of directors, industry associations, key clients, partners and the media. Jim leads positioning on important issues related to ETFs and is responsible for advancing long-term ETF strategy and innovation. He is frequently quoted in the media due to his extensive history with these assets. As well as being responsible for State Street Global Advisors’ global funds management organisation, Jim is a member of the Executive Management Group and Global Product Committee.

Joining State Street in 1992, you’ve witnessed the rise of the ETF industry from its very beginnings. Looking back on your experience of almost three decades, how did the ETF come to be as popular as it is today?

Jim Ross: After the stock market crash in 1987, which became famously called Black Monday, regulators were asking for fully collateralised and transparent investment products. At the same time, financial advisors started pushing for tax-­efficient structures. In Europe, the latest regulation is leading in the same direction as it focuses on more transparency and the cost-efficiency of investment products.

But there are other reasons behind this shift from actively managed funds to passive products. In my opinion, another key factor behind ETFs’ success is the fact that they are the only investment vehicle that is investable and tradable at (nearly) the same costs for both institutional and retail clients. (Even so, it’s worth remembering that ETFs were initially developed to be a trading product not an investment product when they were first introduced.) And finally, the product structure of an ETF has so far turned out to work efficiently in good times as well as in bad, and has been tested by many different market events and cycles over 26+ years.

As chairman of Global SPDR, you have met with a huge number of institutional investors around the world in recent years. What trends and developments have you observed in the financial industry?

Jim Ross: First of all, there is no such thing as a generic investor, and one of our core beliefs at SPDR is that ETFs are about finding simple and transparent solutions to help meet investors’ needs. From my perspective, investors’ key focus in 2019 overall is to prepare for an end to the long-term bull market that global equities have enjoyed for the past decade. Those fears are being nourished by the strong gains in US equity markets over a long period, weak economic data around the globe and political uncertainties, which remain on a high level in general and in particular between the US and China and in Europe.

That said, we have seen a lot of interest in late-cycle products such as low-volatility strategies and sector rotations in the favour of defensives such as utilities and healthcare. Within fixed income, we saw new assets flow into short-term US Treasuries during the fourth quarter of 2018 in the light of falling yields.

How is State Street Global Advisors positioned to drive the development of ETFs?

Jim Ross: In my view, the ETF ecosystem shows great potential for growth. As one of the leading ETF providers globally, SPDR offers a full range of products. These include funds suitable for various market conditions in the US and Europe, as well as in Asia and Australia. We can look back proudly on a long history of innovation in developing ETFs that allow investors to address their portfolio construction challenges. We have many strengths, but one clear advantage comes from our sector approach, which is backed on the one hand by experienced teams, and on the other by simple and transparent products.

With these advantages, I would expect SPDR to benefit further from sector rotations and risk-avoiding strategies such as low volatility, value and smart dividend. In addition, our range of high-quality fixed-income products should benefit from inflows into less risky safe-haven strategies. 

Where do you see further growth potential for the ETF industry in general, especially given that global equity markets have enjoyed a pronounced bull market over the past decade?

Jim Ross: ETFs continue to be one of the fastest growing parts of the financial industry. Partly that stems from the fact that more market segments are now accessible via exchange-traded products than in the past, as well as changing regulations, which have opened the ETF market to new groups of investors. Even so, one of our key missions remains education. Investors really need to understand the product itself and its behaviour in different conditions – namely bull, bear, volatile and quiet markets.

Even more important is a deep understanding of the index an ETF is relying on. It is a challenge for investors to keep track of the rising number of products, in particular the huge number of smart-beta strategies now available. 

As I said before, we are late in the cycle, and it is worth remembering that SPDR managed to end 2008 with a growth in new net assets under management. Even as markets were being hit heavily by the financial crisis, investors shifted money into defensive-sector ETFs or used ETFs as a hedging instrument. 

Stefan Kuhn: I agree with Jim’s view on education. We want to establish ourselves as thought leaders with regards to ETFs in Europe as we believe that there are many more potential applications for ETFs across asset managers, asset owners, and intermediaries. Many of those applications are new and developing and we want to make sure clients are aware of both the chances and the potential risks. For example, we are currently discussing with some of our clients how to position their portfolios more defensively in the current macro environment.

Everyone seems to talk about the benefits of ETFs: low cost, tax efficiency, transparency, you name it. But nobody seems to talk about the risks. What would you say are some of these? 

Jim Ross: I would focus on poor education – if an investor’s lack of knowledge leads to a bad experience in poor execution or performance, say, they might well steer clear of ETFs entirely after that. Growing the ecosystem and growing our own platform also means educating people. At the end it is all about education, something that will remain key for our industry.

With your long-term experience, what is your expectation for the ETF market in five years? In which regions do you anticipate further growth opportunities? 

Jim Ross: Within SPDR, we expect Europe to grow faster than the US in the years ahead. One reason is the broader usage of fixed-income ETFs in all kinds of market segments. Moreover, new groups of investors are likely to consider using ETFs for the first time, such as smaller asset managers, pension funds and the treasury departments of small and medium-sized corporates. But the US is likely to show potential as well. Besides thematic investing, sustainability-related strategies could be an opportunity given the small proportion of the US market they currently make up. Emerging markets are potentially a huge market and one where we see significant growth potential in the long run, in Asia in particular. To date, there is relatively little in terms of assets invested in Asian products and a limited range of products on offer – especially outside of Hong Kong and Singapore.

Thank you very much, Jim, for taking the time to give this interview.

Commerzbank Disclaimer
The views expressed in this article are those of the author and may differ from the published views of Commerzbank Corporate Clients Research Department, the communication has been prepared separately of such department. No representations, guarantees or warranties are made by Commerzbank with regard to the accuracy, completeness or suitability of the data.