Gus Fleites Interview

By Jim Wiandt, Managing Editor

"I think it's 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."

Gus Fleites is a Principal of State Street Global Advisors (SSgA). He is responsible for the development and implementation of exchange-traded funds (ETFs) and offshore investment products. At the 2nd Annual Exchange-Traded Fund & Index Share Forum, Gus sat down with Managing Editor Jim Wiandt to discuss the future of exchange-traded funds and SSgA's recent moves to establish itself in this growing market.

Jim Wiandt: I've been in Barclays captivity all morning at an ETF conference, so. . .

Gus Fleites: Poor you. You can quote me on that one too.

JW: I will. We'll start with a very basic question. What do you see as the most significant benefits of investing with ETFs?

GF: A couple of things. One is the ability to transact throughout the day; the fact that you can trade the fund just like an ordinary equity. More importantly, you are able to put in stop loss limits for any ETF compared to a mutual fund, which you can't transact in. Number two would be tax efficiency. I think the retail market is beginning to understand the advantages of retail investing. That is, the whole concept of having a diversified portfolio of securities, a lower turnover, etc. But I think what retail investors don't understand is that the low turnover is compromised in a traditional index mutual fund, because the mutual fund must still provide the liquidity for people coming in and out. That's going to create turnover, which will have an impact on the fund's ability to track the index. Turnover creates a distribution of taxable gains, which an index fund - if it is has a true buy and hold strategy - shouldn't be experiencing.

Turnover also causes transaction costs, which will affect tracking error, and also lead to capital gains. So I think that the ETF is proficient at ensuring the true advantages of index investing for the retail investor in a way that the traditional mutual fund can't.

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