In this candid interview, Anna shares her view on the power of ETFs to deliver optionality and diversification in a single trade. Don’t miss her take on how that’s reshaping portfolios and redefining investing for the future.

In this exclusive series, we sit down with State Street Global Advisors Executive Vice President and Chief Business Officer Anna Paglia annually to get her unfiltered take on the ETF industry and the future of investing. Read on to find out what role she thinks ETFs will play in shaping the future for investors.

In today’s rapidly evolving ETF market, what are the most pressing risks investors face?

I’d say there are two primary risks for retail investors:

1. Misalignment between investors’ goals and their portfolios. The market is changing quickly — not every strategy is appropriate to achieve certain investment objectives. I worry investors may be disappointed in the long run if their expectations and goals don’t align with what they’re buying.

2. The abundance of information. There’s too much information out there and it’s getting harder to know what’s reliable.

For example, social media plays a big role in today’s investing environment. And there’s an interesting paradox there — those with credible, verifiable information have constraints or regulatory requirements within which they need to operate, but some of the loudest voices on social media who may lack this same information are often unconstrained.

I believe asset managers like State Street Global Advisors can provide timely, accurate, and balanced information, and we have a compliance framework within which we have to operate. We can’t use certain language or words — we have to play by the rules.

Those not FINRA registered — finfluencers, for example — can start a Reddit thread and say whatever they want about securities without consequence unless they engage in fraud, flat out lie, or mislead investors. And so, I think it’s critical for investors to be discerning about the source of the information they’re getting before making an investment decision.

Over-proliferation of products and ever-increasing product complexity are the biggest risks for more sophisticated investors. Understanding the ins and outs of products is paramount.

Right now, there’s a big movement around customization of scale. Clients want to work with their advisors to ultra-customize their portfolios. They want their own S&P 500® with customization and tax alpha. Advancements in technology make this possible, and I think it’s a great tool, especially for smaller investors. But investors need to understand the tradeoffs and be comfortable asking questions like, “How much can I customize my portfolio before it departs too far from the S&P 500?” and “Am I okay with that?”

Another example is buffered ETFs. When you buy a structured or buffered ETF, you may know you’re capping the downside — but do you also understand the extent to which you may be limiting the upside? If you do, it can be a great tool to have in your toolkit.

I believe access to more products — including more complex products — is a huge benefit because it provides optionality to investors. But it also means you really have to understand what you’re buying before you invest.

How should investors be thinking about managing risk now?

The most important thing is for investors to understand the timeframe for their goals. Participation in financial markets is not the key to getting rich fast. And those investors who want to get rich fast…a few may get lucky, but many more will end up disappointed. That’s because investing in financial markets is a long game — it’s about building wealth consistently over time, not getting rich overnight.

What innovative risk management strategies have you seen emerge in the ETF space? And how do you think these strategies could disrupt investing over the next five to 10 years?

We’ve already seen technology play a big role in building solutions for clients. Right now, technology integrated with investment management capabilities allows asset managers like us to offer robust model portfolios to advisors. All advisors have to do is match the characteristics of those portfolios to the needs of their clients.

That’s a powerful, simple, and relatively quick way to allocate clients’ assets to specific investment strategies that align with their goals.

Direct, customized investing is another tool that can be used to pinpoint investors’ objectives. Tax alpha is one of the main drivers of direct indexing and customization scale. And, I think it’s becoming clear to clients that it’s not just what you make but what you keep that matters.

If there’s a smarter, technology-enabled way to manage your portfolio and generate tax alpha that’s going to help you save more and build more wealth, why wouldn’t you do that?

Digital trading is another technological advancement eliminating barriers to entry and taking the global industry by force. Now, people can trade without having to pay significant trading or transaction fees, which I see as helping to further democratize access to investing for everyone.

There are also some significant regulatory changes that, when mixed with technology and access, help investors save more. In certain jurisdictions, for example, electronic trading and the ability to make small monthly contributions to your brokerage account are incentivizing people to get into financial markets.

It’s testament to the fact that innovation isn’t just about building new products. You have to think about the entire ecosystem. And the truth is, innovation is only real if the entire ecosystem is moving forward — everything has to work together seamlessly.

Alternative ETFs have been a laser focus for State Street Global Advisors this year. What’s driving the growing interest in alternative investments among institutional and retail investors?

Everybody is talking about alternative investments. At the end of the day, they’re another chapter in the ETF story of democratization. Think about it. We brought private credit and the All Weather hedge fund strategy to market via the ETF wrapper. We did that!

An industry colleague once compared the ETF market to something we’ve all experienced as kids: attending a birthday party at the local pool. Everybody’s excited and you’re having a great time. But then you look behind the pool to where there’s a group of cool kids in a VIP section and — surprise — you’re not invited. The “cool kids” are like private assets and other segments of the market, or hedge funds and other strategies, reserved for only qualified investors. But now, everyone has VIP access.

Bringing this exposure to the everyday investor through the ETF wrapper is the next frontier of democratization.

And so, I see our job as twofold. First, we have to keep doing what we’re doing — build for today so that we can give clients what they need to create long-lasting portfolio building blocks. But we also have to build for tomorrow.

We need to keep asking ourselves what strategies will benefit our clients in five, 10 or 20 years from now and reverse engineer from those solutions. We need to have the courage and the commitment to build products designed for long-term resilience, even if they may not be immediately successful.

Building for today is easy — it‘s informed by data and client demand. Building for tomorrow is more difficult. Nobody has a crystal ball that can predict future market movements or upcoming trends.

But this is where seasoned asset managers like ourselves can make a difference. We study the trends, we analyze the data, we engage with our clients (better yet, we’re obsessed with our clients), we form beliefs, and we’re willing to invest in innovation to make sure that we can always offer financial tools and services that are timely, effective, and compelling.

Do you think alternatives are becoming a more permanent part of strategic asset allocation or is this trend cyclical?

I think they will become a more permanent allocation. We’ve discovered the 60/40 portfolio is no longer a conservative way to manage equity and fixed income assets, because assets can behave in ways we don’t anticipate. When this happened in 2022, everyone was shocked.

What will the 60/40 become? How much of an allocation will alternatives get? I’m not sure yet. I’ve heard two opposing positions from advisors and I believe each holds merit for now:

• One advisor said that he’d never allocate his clients’ portfolios to alternatives. The reason? For as little as he’d allocate to alts (2–3%, and no more than 5%), that’s the 2–3% that would get him fired. Sure, it’s the portion of the portfolio that may generate the best returns, but it could also record the biggest losses. So he was adamant that he’d never do that.
• Another advisor said she’d always allocate 2–3% to alternatives. Why? Because it was the way she added value. Her clients, she said, could go anywhere to get a 60/40 portfolio. But this was a way to differentiate her value with clients, by helping them find better, more creative ways to generate returns.
  

There’s not a right or wrong answer. I think both are perfectly reasonable ways to address alternatives in a portfolio right now. That said, I do believe alternative allocations will continue to grow.

Speaking of financial advisors, what do you think their role is right now in the potential growth of alternatives?

Well, the alternatives definition is so broad currently. In a sense, I think part of the reason we’re getting such differing opinions on alts is because there isn’t a clear definition. Where some advisors see and use alts expressly for the purpose of alpha, others are using alts squarely for risk mitigation or hedging.

They’re two sides of the same coin, so the divergent reactions of the advisors I mentioned don’t surprise me. As we start to see alts categories crystalize and become more niche in their descriptions, I think we’ll see advisors’ perspectives continue to take shape.

But it matters who our audience is. And, at the end of the day, I think advisors are wondering the same thing as investors — what’s in it for me? What does this do for me as an advisor and fiduciary? How does this allow me to demonstrate my value in a better way?

We have to consider the entire value chain and make sure we’re connecting the dots for all players in the ecosystem.

Let’s switch gears and talk disruptive technologies for a moment. How are AI, blockchain, and big data enhancing ETFs, risk management, and investment decision-making?

Being client-centric in an environment that’s opaque is a big challenge. Without the proper data, we can’t make informed decisions about what products to launch, which channels to prioritize, or which clients we should focus on.

Data informs strategy, it informs pricing, it informs sales, and market trends. That’s where AI comes into play. AI can be used to help fill in missing pieces of the data puzzle. AI can help us not only understand current trends, but also anticipate and predict new ones.

Here’s a silly example: A few years ago, you’d get in your car, set your destination in the GPS, and it would give you an ETA. If you were me, you’d try to beat the GPS’ ETA — and I would! But, today? It’s impossible. Those systems use AI and predictive analytics, which are constantly learning about our habits, so that it’s impossible to beat the GPS. It knows exactly how fast I’m going to drive. It knows current traffic levels. It even knows stoplight timing.

Predictive analytics and AI are things we don’t use nearly enough. But, as we move into the future, these tools will help us dissect data, organize data models, understand market trends, and ultimately help us make more informed decisions.

Last year we asked you about ETFs’ potential role in shaping the future of retirement. So, where are we now?

There’s a tremendous market for retirement assets in index funds. We’ve estimated the retirement industry is currently allocating US$4 trillion in assets to index funds. But, the retirement industry is fragmented due to regulation and technology.

For example, most 401(k) plans do not buy ETFs because of technology issues and regulation. They have to buy at net asset value (NAV), not the open market. We have to process orders coming in overnight, so we can’t trade everything on the exchange. And 403(b) plans can’t buy CITs because of current regulations.

As a result, you end up with a highly coveted US$4 trillion in assets that the retirement industry wants to allocate to pension plans. But because of this fragmentation, that content delivery is patchwork. It’s delivered through ETFs, index funds, CITs, and institutional accounts. That fragmentation is expensive.

Think about operating two S&P 500® funds, one ETF and one index mutual fund. Now, you have two prospectuses, two sets of regulatory documents, two fact sheets, and two webpages. You have to pay independent accountants to do the review for two different products. And who largely pays the costs of this fragmentation? Investors.

ETF share classes are one way the industry could remove these challenges, because we’d have a mutual fund share class living within an ETF product. That means you’d only need one fact sheet, one product webpage, one independent accountant, and you could benefit from the size and scale of existing products to bring to market something that would help the retirement industry.

All that is to say, our job is not just to fix what is not working. We also have to look at what is working and ask ourselves how we can improve upon it. If Steve Jobs and so many other tech entrepreneurs didn’t ask themselves that question, we wouldn’t be using smartphones right now. If something can be done more efficiently, why wouldn’t you want to be the one to provide a better playbook?

What most excites you about the potential for ETFs to help investors manage longevity risk or even the risk that they might not be able to retire as comfortably as they’d hoped?

I’m most excited about our ability to get creative with the rest of the ecosystem. We have the opportunity to partner with big players in the game to create something really special.

I find it so refreshing that, here at State Street Global Advisors, we have the ability to partner with best-in-class companies to bring premier solutions to our clients. Partners like Apollo, Galaxy, Blackstone, Bridgewater — I find them all very exciting.

Very rarely do you see a framework within which you can pull best-in-class capabilities and package them in one solution that clients can access using the State Street Global Advisors platform.

We continue to expand our work with existing partners while onboarding new ones, looking at the real possibilities those partnerships pave the way for. We also continue to look inward, asking ourselves, “What are the things that we do really, really well here that we can bring to our clients?”

To me, these are going to bring about game-changing possibilities within the next five to 10 years.

Looking ahead, what game changing ETF innovations excite you most?

We’ve talked about each of these already, but I’d say ETF share class filings, private assets within the ETF wrapper, and the expansion of digital capabilities.

What do you see on the horizon that could redefine portfolio construction in the next decade?

As we move into the future, I think it’s important to remind investors that ETFs offer something financial markets and single stocks don’t — the power of diversification and optionality in a single trade. Meaning ETFs give you the ability to be very broad or very targeted, based on your beliefs.

If you just want to be invested in the market, there’s an ETF for that. If you want to participate in US equity growth, there’s an ETF for that. If you believe Europe is the next frontier of growth, there’s an ETF for that.

But you can also get very targeted with ETFs. There are ETFs that offer specific allocations to sectors and specialized asset classes. There are ETFs that allow you to invest in gold. If you believe in the growth of industrials, healthcare, or technology, there are ETFs you can buy to focus on that specific sector.

All this is to say, ETFs are bringing the power of diversification in a single trade. You can go as broad or precise as you want without relying on single stocks to get there.

That diversification, or optionality, is a powerful thing. And I know it’s going to continue to transform investment portfolios in tremendous ways as we move forward into the future.