Anna Paglia, Executive Vice President and Chief Business Officer for State Street Global Advisors, has had a front-row seat to the exponential growth of ETFs during her 27-year career in asset management.

In this exclusive interview, Anna shares her perspective on ETFs as the great equalizer, offers her candid views on what the future may hold, and discusses why she believes ETFs have the power to make wealth more accessible to every investor.

What most excites you about the ETF industry right now?

I’ve spent 27 years in the ETF industry, and that’s not by accident. I deliberately joined because I believe the ETF wrapper democratizes access to investments. And I feel strongly that building wealth should be accessible to everyone, that financial markets should be open and accessible to everyday investors as well as the largest institutions. The ETF was the missing link.

And so, there are many things that excite me about ETFs, including that they’re:

• Accessible and cost-efficient. ETFs are an equalizer in financial markets, giving everyone the same opportunities.
  
• Dynamic. ETFs are dynamic, in that the ETF wrapper has the ability to evolve, which is something we don’t see elsewhere in the market — like in mutual funds, for example.
  
• Investor-driven. In the ETF space, we may build strategies that we feel very confident about. But once they go to market, if investors don’t like them, they die on the vine. Every day, investors vote with their money and decide what’s good and what’s bad — that goes hand-in-hand with democratization.
  
• Transparent. With full transparency and the ability to track the performance of the market, ETFs are becoming a catalyst to push away mediocre performance. Today, active mutual fund managers do not compete against their peers — they compete against ETFs for as little as 3 basis points (bps). If they cannot beat these low-cost ETFs, they don’t have a chance at surviving. But that means the investor wins. And when the investor wins, the industry wins.

What is the relationship between regulation and the increasing democratization that you believe ETFs bring?

ETFs are a forcing mechanism, which means they’re pushing regulation to change. ETFs’ secondary market trading is playing a big role in this because the secondary market is pretty much an open border. Anyone can buy a fund, for example, that is traded in Canada or Tokyo. People are able to get access to the best type of regulation and arbitration.

Bitcoin ETFs, for instance, have been in negotiation with the SEC for the last five years. If investors didn’t have access to a Bitcoin ETF in the US though, they could still buy it in Canada, Bermuda, and Europe. Ultimately, they were greenlit.

Some may think regulation is too burdensome and others too relaxed. What are your thoughts relative to ETFs?

Whenever people think regulation is easing (like, for example, with the ETF Rule bringing down some barriers to entry), there is usually a concern that we may be losing something. For example, are we losing some belts and suspenders?

I don’t believe so. Because this industry is so competitive and so commoditized, asset managers really care about their reputation, regardless of whether there are rules mandating certain controls or risk management tools. If an asset manager puts a lemon in market or a fund that‘s likely to implode, that’s going to have a big impact, no matter the size of the portfolio. Once you lose people’s trust, it’s hard to regain.

There’s a saying, “Trust is earned in drops and lost in buckets.” And this is especially true in the asset management industry. You earn clients’ trust in drops. But once you lose it, you lose it in buckets and you can almost never recover.

Over the next 5 to 10 years, what major disruption do you expect to see in the industry?

I believe digital assets are going to play a big role in this industry.

I always think about the “iPhone moment” — something we’ve all experienced. It was that moment when you opened the box and turned on your iPhone for the first time. You probably found yourself saying, “Wow! I can click this. I’m online. I can listen to my music. Answer emails. See all my text messages.” That moment was magic. Because when I was growing up, my phone was attached to the wall, my TV was in another room, and I listened to the radio while driving.

But the iPhone brought all these different telecommunication means into a single device, in the palm of your hand. That was the iPhone moment. And the one single thing that created that moment was convergence. That convergence moment hasn’t happened in financial services yet.

Consider, for example, the way we save, invest, and shop — it’s all fragmented. We have a savings account, a checking account, a brokerage account, cash, and credit cards. But digital assets are building that convergence. In my opinion, our industry’s iPhone moment happens when all of these different touchpoints in financial services converge. This is where the real transformation in digital access happens.

How does that translate into ETFs?

Already, we have ETFs marketed as crypto ecosystem ETFs, digital asset ETFs, and blockchain technology ETFs. We have already seen companies start generating revenue through their association to the digital assets industry — and it will continue. So that’s going to be a big change in the market.

The other evolution is going to be technology itself. ETFs trade on secondary markets. They benefit from the advancement of technology that allows investors to trade in one click. I think that one-click trading is going to differentiate ETFs from other collective investment schemes over the next five to 10 years.

We touched on technology as an industry driver. There’s been a lot of buzz about AI. How do you think AI or machine learning will shape the future of this industry?

AI makes our jobs easier — if we use it for the purpose it was created for. We’ll be able to save so much time in the day to dedicate to something else, to more value-added activities. I think about generative AI systems that can help callers get the answers they need without having to wait and speak to a person. Or the way generative AI has accelerated how we write emails with predictive text.

There are many things that we can do with AI that will make us more efficient, more nimble and, in the realm of client service, that will help us better serve investors. That said, I don’t believe AI will be used to build investments or portfolios. Some have tried and it didn’t go anywhere. I don’t think that particular use case for AI is the future of asset management.

How do you see ETFs influencing the future of retirement?

Right now, 401(k) plans don’t buy ETFs because of the regulatory framework. And pension funds can only buy them on an exchange, which is a price difference from the net asset value (NAV). So there’s nuance in regulation that makes it hard for 401(k) plans to invest in ETFs. However, ETFs are building blocks.

Think about target date funds: what’s the goal? The portfolios act differently based on the various risk tolerances the investor will have throughout their entire lifecycle. So, when building a portfolio, we take into account a number of criteria: risk profile, the investment merit, and the exposure — but also fees because they eat into overall performance.

If investors have more opportunity to access cost-effective market performance, they can use the rest of their portfolio to get exposure to more exotic or spicy asset classes without having high fees eat up too much of the performance. To me, a 401(k) portfolio is never going to be invested in one single ETF or 100% in ETFs. But ETFs are going to play a major role in the overall costs of the portfolio.

At a recent conference I attended, an SEC Commissioner said that she was worried about retirement because, “People don’t understand the cost of their investment because it’s not explained to them in terms of years to retirement.” And that’s true. We always explain cost in terms of the investment.

For example, we tell people, “If you invest US$10,000 today, you’ll pay US$500 in fees over five years.” But nobody is telling people, “If you didn’t invest in 100 bps products, you’d be able to retire two years earlier.” When you explain it in terms of years to retirement, the cost becomes much more tangible.

At the end of the day, because of their cost efficiency, I believe ETFs will play a big role in accelerating one’s time to retirement.

Where do you see ETFs in the alternative space being the most popular?

Making illiquid assets liquid. That’s the entire ETF story. If we had this conversation 25 years ago, no one would have believed that we’d put bonds into an ETF, or that with a US$25 or US$50 investment, one could get exposure to bonds, emerging markets debt, or senior loans.

This evolution wasn’t easy, but the ETF evolved so that illiquid securities could be put into the ETF wrapper and become liquid.

So what now? Private debt. Private markets. But it’s not done by putting illiquid investments into the “magic ETF box,” where everything becomes liquid and accessible. Asset managers have to work with private markets, private credit issuers, and the entire ecosystem to come up with a solution that is going to unlock liquidity in the secondary market.

Nobody has cracked that code yet, but we’re spending a lot of time trying to figure it out — because that’s the next frontier in the ETF’s evolution.

Do you see alternatives also extending to individual investors?

Yes, absolutely. The power of ETFs is in providing access to investors who would not have had that access otherwise. If you provide access to private markets or private credit for banks and institutional investors, you make it easier for them — but they already have access. They can already do it themselves.

When you bring it to retail clients, that’s where the real power of the ETF wrapper comes into play, because those clients would not have access if not for the ETF. That’s the mission: bringing those funds to people who would not have access otherwise.

Given ETFs are opening up access to new markets for individual investors, do you think asset managers also have an obligation to educate investors about those markets?

100%. And I feel very strongly about this. What we do is not a job. It’s a privilege.

Every single one of us here at State Street Global Advisors carries that privilege. It doesn’t matter if you’re in marketing, compliance, investments, products, or something else.

Whether or not you like your job, you have to understand the weight that your decisions carry for others and you have to respect the opportunity that you have been given. Always.

People entrust us with perhaps the most valuable thing outside of their families: their money. Through education, we have the power to help drive financial decisions, hopefully allowing people to retire early, send their kids to college, or go on that beautiful vacation.

It gives us great power — and as the Spiderman Rule goes, “With great power comes great responsibility.”