00:00Success to the market has long been a key driver of wealth creation in America and ETFs increasingly playing an
00:06important role.
00:06They've pulled in more than $1.4 trillion so far this year while expanding well beyond stocks into bonds and
00:13private markets.
00:14Joining us now is a woman who knows that very well.
00:16It's Anna Paglia, Executive Vice President and Chief Business Officer at State Street Investment Management.
00:21Anna, thank you so much for coming on.
00:23Thank you for having me.
00:24It's been a remarkable run recently.
00:27I mean, it's what some are calling like the greatest wealth creation that we've seen in some time between these
00:32AI IPOs, two million new millionaires minted last year alone.
00:38Where does State Street fit in all of this?
00:41Where are you seeing and are you seeing a lot more new money get put to work?
00:45We are seeing new money being put to work, not only with us, but with the industry at large.
00:50You mentioned the growth of the ETF segment of the market, which to me is like a revolution that is
00:58somehow 30 years in the making because it's something that we have seen over and over again over the years.
01:03But we see investors coming into the ETF market.
01:06We see also single stock products or single stocks like IPOs and equity being also front and center of investors'
01:15mind.
01:15And U.S. markets continue to dominate.
01:17So the $1.4 trillion in new assets have been really concentrated in U.S. equity and fixed income.
01:25So within that, this new wealth, where does it tend to go?
01:29You mentioned some of the broader segments, but is there a commonality between someone newly has minted all this money,
01:35the SpaceX IPO happens, and all of a sudden they've made a lot.
01:38Is there a commonality in where that kind of wealth is flowing to?
01:41Well, I don't think that the commonality is in the asset class or in the product specifically.
01:46I think that the commonality is in the technology, is the entry point, the way by which clients enter the
01:53markets.
01:54Right now, we see retail clients having some sort of significance in this industry.
02:01If you think about it, 10 years ago, retail flows were about 10% of the assets.
02:06Right now, they are between 20% and 25%.
02:09So the entry point is becoming very different.
02:12Why do you think it's doubled?
02:14That's pretty remarkable in terms of their makeup of that asset class.
02:18Well, it's a combination of access, level of sophistication, and technology.
02:23Right now, you can just buy stocks or buy ETFs with one click on an app on your phone, which
02:29is something that you couldn't do 10 years ago.
02:31And that really brings a higher level of sophistication.
02:35People want to be involved in financial markets, are more knowledgeable about where their wealth is being created.
02:41There's two ways to look at that.
02:42One is the positive way, which is this is democratization.
02:45This is a good thing that anyone can pick up their phone and do it.
02:48The second way, which has been talked about a lot, too, is maybe this gamifies thing.
02:52There's this fear that all of a sudden, because of the existence of betting markets and online discourse, that people
02:57are sort of treating markets more like a casino.
03:00Are you concerned about those trends, too?
03:03You know, I could not agree with you more.
03:05And personally, I am very concerned, because to me, financial markets are a way to create your wealth where persistency,
03:13resiliency, the compounding effect of savings is incredibly important.
03:18Using financial markets as a way to gamify your gamble on stocks or savings, it becomes going down to a
03:25very, very dangerous path.
03:27And to us, what we can do is really educate investors.
03:30The power of education cannot be underestimated.
03:33What about just the existence of ETFs, like, you know, like a five times levered inverse single stock ETF?
03:39We've seen, obviously, more acute issues in areas and geographies like South Korea, for example, and having regulators step in.
03:46Do you think it's just an education problem?
03:49Or should these products maybe not exist?
03:51Or should there be limitations on who and how people can use these products?
03:54Right now, the way this is being approached is by disclosure, transparency and education.
04:01We haven't seen any big obstacles or regulatory restrictions to the proliferation of these products, especially markets that you mentioned,
04:10like South Korea.
04:11At State Street, we do not participate in that segment of the market.
04:15We do realize and we do understand that there is a segment of the investor population that is really attracted
04:21to those products.
04:22For us, it's more about wealth creation.
04:24So, right now, we are really staying on the other side of the market.
04:29In moments like this, I know it's incredibly short term, but when you have remarkable macro-led volatility, when there's
04:35a lot of anxiety, when bond market, bond yields are going higher, how does behavior change on your platform?
04:41I know it's quite huge, so it's hard to make a generalization, I'm sure.
04:44But are people very reactive when they see these headlines and see volatility, not in equity markets necessarily, but at
04:51least for now just in bond markets?
04:52We try not to react to headlines.
04:55The way we look at that and the way we look at our offering and our business is very data
05:01-driven, is very strategy-driven.
05:03There are many shiny objects that really come to market, and especially when you come into the ETF world where
05:09the wrapper and the technology is so simple that allows you to put many different strategies in it.
05:15It's really easy to be attracted by these shiny objects, but we try intentionally to stay away from those.
05:22I kind of feel like private credit might be a poster child example, considering everything that happened around retail and
05:26private credit start the year.
05:27When State Street launched its private credit ETF, PRIV, a lot of fanfare, because it was really innovative to get
05:34something where you could have liquidity in an asset class that historically is less liquid.
05:40The uptake, though, feels somewhat limited.
05:42Still majority, solid majority, I think like 94 of assets are the anchor investors in that, an institutional fund.
05:48And I just wonder what you think it will take to get more in this fund, to get it, have
05:52a bigger uptake.
05:53Well, when we launched the PRIV, as we call it, and the shorter duration PRSD, we just turned one year,
06:03we really made a bet.
06:06It was not a shiny object.
06:08It was not that people are talking about private assets, so let's launch an ETF.
06:13We have a vision.
06:14We have a belief.
06:15We believe that the public market and private markets will converge.
06:18We also believe that high-quality, investment-grade private credit can provide additional yields to portfolios.
06:27So we came up with this idea of pretty much reinventing core, giving a different view about the ag and
06:35the performance of the ag.
06:37So for us, PRIV is not really, here is a private credit ETF.
06:42This is a reinvention of core or core plus.
06:45We added another plus in core plus.
06:47And if you look at the yields and the performance of that fund, it has been constantly outperforming its benchmark.
06:56And that's all thanks to the higher yields associated with the private segment of the portfolio.
07:01So we do have a belief, we do have a vision that is not just temporary or short-term in
07:06nature.
07:07Do you think, though, that retail private credit products and, therefore, PRIV, even though it has that ag aspect to
07:14it, has just like an image, has a PR problem right now?
07:17Just given everything that started the year and we continue to see redemptions from, again, a very different product from
07:22your ETF, but from BDCs.
07:24Like, is there some rehabilitation that needs to happen?
07:27It's funny you say rehabilitation.
07:28Well, the headlines, let's make it clear, the headlines have not helped.
07:33But this is why quality matters.
07:36Our products are investment grade, and it's not by accident.
07:40We have a belief that investment grade, the high quality segment of private credit, private assets, is very different from
07:48what has been captured by the headlines.
07:50And this is why our funds have been experiencing creations, redemptions, even outside of the big institutional investor.
07:58And we have been able to liquidate the assets without really hitting those barriers that other private assets have encountered
08:05this year.
08:06Can I ask, Anna, what's next?
08:08This is an industry that is always innovating, always looking for something new.
08:12What's next that you haven't conquered, again, in an ETF world that is already quite expansive?
08:17This industry is beautiful because it evolves with clients.
08:22Unlike other parts of the industry where the manufacturing side determines what type of exposure we are giving to clients,
08:30the ETF industry works in the opposite way, where client demands really dictates the future of product innovation.
08:37And when we look at the future of product innovation, we think that there is a lot of room to
08:42expand income capabilities,
08:45protection capabilities, and also digital assets.
08:48We have not seen yet what tokenization and digital assets can open for the ETF industry in the next five
08:54years.
