GF: We'd like to focus our attention on ways for U.S. investors to be able to trade on those markets, because you'll find that if you go to the markets where the liquidity is really there, the investors are better served. Not that we aren't looking into it - we are coming out with the Global Titans - but we have to work on some fairly innovative features to ensure that they trade at a fair price. If push comes to shove, though, we'd rather develop the products in the local markets where the securities are trading.

JW: Do you see ETFs chipping significantly into the mutual fund industry, or do you see them remaining a niche player?

GF: Well, that's the million dollar question, isn't it? I don't see them as a direct competitor to the mutual fund industry. I do see them as a next-generation index fund product, so I think what you'll see is investors who have historically used the index mutual fund start to come into the ETF structure. In fact, if you look at companies who offer index mutual funds, I think they're all out there looking to launch their own ETFs. I think it is an evolution of the index mutual fund in that the greatest source of tracking error and tax inefficiency is shareholder activity. The ETF is successful in taking shareholder activity from the fund and putting it into the stock market, so from that point it's a better mousetrap.

There are some instances where the mutual fund might still be preferable. It might not make sense, for example, for a small dollar cost-averaging investor to use ETFs. But some of these Internet-based brokerages may institute plans where people are able to invest in ETFs in that manner more reasonably, so a lot of those disadvantages may start to disappear.

JW: Any projections for net assets of State Street funds in the next 5 years?

GF: I think it's probably safe to say ETFs now probably represent somewhere between 5 and 10 percent of indexed mutual fund assets with assets at about $50 billion. I think it's probably fair to say that percentage will double in the next 5 years. It will all be based on how well index funds continue to do,
and unfortunately much of it will be based on performance. You know, as much as I hate to admit it, we like to think that index funds have grown because people understand what index investing is all about. But in actuality, the returns have really driven investment. So if the S&P continues to do as well as it's done, we could have $100 billion in these products in 5 years. If not, it might be well south of that - but the market's really going to determine that.

09/26/2000

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