Tony Rochte is senior managing director in State Street Global Advisors' (SSgA) intermediary business group, which manages $250 billion in assets. He leads distribution, client service and strategy for financial intermediaries and insurance companies. His efforts are focused on mutual funds, exchange-traded funds (ETFs), separately managed accounts and institutional sub-advisory strategies.
Based in Boston, Rochte has spent half his career in the ETF business, having joined Barclays Global Investors in 2000, when this was a $20 billion market. (The global total in ETF assets is now estimated at around $1 trillion, with the Asian figure put at $58 billion by the ETF liquidity trends report published by Deutsche Bank on October 5.)
Rochte's last role at BGI was as national sales manager for the iShares business before he left to join SSgA in October 2006. Prior to joining BGI, he served as vice-president of investment services in Fidelity Investments' institutional brokerage group.
SSgA now has 88 US-listed ETFs, 100 global ETFs and manages $185 billion in ETF assets globally, $165 billion of which are US assets. It has a 27% share of the US ETF market.
Sammy Yip, Asia-Pacific head of ETFs in Hong Kong, also joined the interview.
New, more complex ETFs are on offer now. Do you share the concerns of regulators, such as the US Securities and Exchange Commission and Finra, and others about such products?
Rochte: Going back eight to 10 years, I can remember the first ETFs being quite innovative. Now there are inverse and leveraged ETFs, and actively managed ETFs have been launched by some in the US, and will come to Asia at some point. With regard to the more exotic offerings, investors should be asking who is the sponsor, how is the index constructed, what is the commitment to the marketplace?
On the flip side, I think the innovation is probably good for the investor -- it's positive that so many different players are entering the market. The US market has 27 players and around 770 US-listed ETFs, but really five players dominate the market: BGI [Barclays Global Investors]; [Invesco] PowerShares; ProShares, a new entrant in the inverse/leveraged space; SSgA; and Vanguard. The market probably doesn't look that different in Asia; you've got Lyxor and some other players.
Still, some of the tools that have been launched in the past 18 months are that much sharper, and I think education needs to improve at the sponsor level. We certainly work hard because we feel a lot of responsibility to educate institutional and retail investors.
We have actually made a conscious decision not to launch inverse or leveraged ETFs [for now]. At this time, we don't have plans to launch these products. But we always continually try to innovate, whether in unique fixed-income offerings or unique commodity offerings, for example.
How much of the market do inverse and leveraged ETFS account for now?
Rochte: Almost 40% of total [New York Stock Exchange] volume is attributable to ETFs, and that was in the high-20s a year ago. Inverse and leveraged ETFs account for 5-7% of NYSE volumes at any one time. So the numbers are pretty significant.
And how about actively managed ETFs?
Rochte: There's a lot of talk about actively managed ETFs, but uptake has been relatively slow. That's got to do with fact that investors looking at actively managed products want to see a one-, three- or five-year performance record. For investors to really want to spend the extra [fees], the performance will have to be there.
So the jury's out on active ETFs, but that's not to say we're not interested. We have filed to launch an active ETF and a target-date ETF in the US. With a target-date ETF, the asset allocation shifts automatically as you near retirement.
What are the main reasons you have not launched inverse or leveraged ETFs?
Rochte: As with any ETF, we look at the business case. The first question we ask is: can we manage it? Step two, we look at whether there's a market for the product, and a market beyond retail investors. The best ETFs today have three core markets: retail financial intermediaries, institutions who push up the volume, and it's not uncommon to have a hedge fund trading it. Once you have all three of those markets, that's a recipe for success.
Are there any interesting ETF market trends you see happening in the US now that are likely to be reflected in Asia?
Rochte: One thing that's happening in the US, and you'll probably see this happening in Asia as well, is that in January 2007 there were only six bond ETFs, coming from one provider. In the past two years, assets have grown from $20 billion to almost $90 billion, and there are now 65 bond ETFs.
You'll see bond ETFs growing in Asia, and other types as well, such as ETFs giving exposure to hedge funds -- in fact, any kind of unique-access products.
ETFs have generally been seen as more of a retail product, but a lot of institutions seem to be buying them too. What sorts of institutions are showing interest and how fast are they putting money into these products?
Rochte: The big investors are a lot of the pension plans in the US, which are looking for unique-access ETFs, not just index mandates that they can get from anyone. We're also seeing more interest from hedge funds, which really help provide liquidity, and we're getting a lot more enquiries from sovereign wealth funds.
Yip: In Asia, over 50% of the volume in bond ETFs is coming from institutions, as retail investors tend to have a higher risk appetite.
Can you give me an overall breakdown in ETF investment volumes between institutional and retail?
Rochte: Institutional volumes are definitely growing faster. The breakdown is probably almost 50/50 in the US now. Ten percent is going through direct retail brokerages, and of the other 90%, probably 40% is sold through intermediaries and 50% goes to institutions.