This week we sit down with Matthew Bartolini at State Street Global Advisors to discuss the company’s position and views on the active ETF market.

SSGA is a pioneer in ETFs, having launched the very first and currently largest ETF in the world, SPY. Nearly 20 years later, SSGA launched its first actively managed ETF - the SPDR SSGA Multi-Asset Real Return ETF (NYSE Arca: RLY). How have your active ETF solutions changed since then?

Our first foray was more into a non-traditional category, as RLY is a multi-asset strategy that rotates across real asset sectors.

RLY is an ETF of ETFs and is meant to be an alternative strategy that can sit alongside the core. Its real return focus helps investors mitigate the eroding effects of inflation on returns. But in a more diversified fashion than a broad commodity strategy, given it can invest across multiple real asset categories.

Now, our lineup is more traditional and expansive, focused on core bond markets, high income senior loan strategies as well as equity sector rotation ETFs. Not to mention, it is not just State Street Global Advisors managed portfolios. Our active lineup features many other premier managers such as Blackstone and DoubleLine.

As an issuer that has been in the active ETF market for over a decade, what are your observations on how the space has evolved?

Active ETFs have become more novel and innovative. And today’s active ETFs are not just alpha seeking strategies focused on beating a benchmark.

Some of them are more outcome-based funds that use the active construct, to not seek excess returns, but to deliver an outcome. And deliver that outcome with more flexibility and customization than an indexed-based strategy could provide. I don’t think that was a consideration in the early stages of the active ETF market.

Beyond that, there has also just been a greater appreciation for them, mostly as identifiable track records for the alpha seeking strategies have been created. They have also been tested during various market events. And that has built comfort in the structure, as well as the ability of the manager to deliver alpha in a transparent vehicle.

This comfort, maturation and innovation has led to a diverse number of strategies as well as wide range of use cases for investors to bolster portfolios in-and-out-of-the-core.

The majority of SSGA’s actively managed ETFs are focused on fixed income. What about the fixed income marketplace do you believe lends itself to active management?

Bond markets are more inefficient than equities, and therefore active managers have a higher probability of exploiting those inefficiencies to deliver excess returns and higher yields. Or both, and with the potential for lesser volatility, as a result of being able to more aptly manage risks, apply sector/security selection, and alter duration profiles compared to a static indexed approach.

The fixed income market is also harder to index across all corners, such as securitized credit sectors like ABS, CMBS, RMBS, Non-Agency MBS, Loans, and CLO’s.

What are some trends, headwinds, or tailwinds that you are keeping an eye on as we head into the last quarter of the year?

There are plenty of tailwinds, and active ETFs have already broken records in terms of full-year flows in 2024, taking in $184 billion so far this year.

Some of the tailwinds are macro-based, as evolving Federal Reserve policy should keep rate volatility elevated. And in that type of market, active bond managers that can navigate macro-fueled risks could see demand.

There has also been broadening of the equity rally, and with greater breadth (outside of the Magnificent Seven driving returns) this should favor stock pickers – provided they know where to look and can apply their skill correctly.

Other tailwinds are the sheer number of options out there for investors to choose from. But that is also a headwind, as with more choice there could be more noise and less time for due diligence teams to fully vet each strategy for implementation.

What do you believe are some key considerations that investors should be aware of when considering actively managed ETFs?

It all goes back to the five P’s: People, Process, Philosophy, Price, and Performance. Understanding who is at the helm of the strategy, what is their process and firm philosophy to derive alpha/outcomes.

The price refers to the fee charged, as some managers are worth the premium, but others are not. And fund’s performance can help dictate that. Yet, without a track record, many new active ETFs must wait before that track record can be built.

While those are the traditional factors, the most critical P that rarely gets mentioned is the Place. The place in a portfolio for an active strategy reflects the end investors’ use and utility it can derive to reach their own goals.

Is it a core strategy? A fund meant to seek high income levels? Or there just to de-risk? Seeing how the manager views their own strategy can help determine this, but also how they market it. And then ultimately the fund’s performance will make the final call where it should go.

Lastly, what guidance would you provide sponsors that are considering expanding their product lineup to include actively managed ETFs?

It’s a crowded market, so be ready to differentiate yourself and make sure you have an “edge” when bringing a new strategy to the market that has no track record.

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