State Street: The One That Was FirstWide moat

State Street launched the first US exchange-traded fund in 1993. It had a decade's head start, the most recognisable ticker in the category, and the institutional relationships to distribute it. It is now a distant third in ETF assets behind BlackRock and Vanguard.

The reason is instructive because it is not price and not product. State Street's flagship remained a magnificent trading instrument — arguably the most liquid equity security in the world — and stayed relatively expensive for the buy-and-hold investor, structured as a unit investment trust with the constraints that implies. BlackRock and Vanguard built cheap core products designed to be held, and won the accumulation flows while State Street kept the trading flows.

The lesson BlackRock should take from it is that being first confers nothing durable. What confers durability is being the deepest pool in the specific use case the money is arriving for, and there is more than one use case. State Street won the one where a hedge fund needs to express a view for three days. BlackRock won the one where a retirement account buys every month for thirty years, and that turned out to be where the assets were.

State Street remains formidable in the institutional business — custody, servicing and index management at enormous scale — and competes directly for the same low-fee mandates that make up 29% of BlackRock's long-term assets and 6% of its fees¹.

It is rated wide here because the outcome is settled. In the segment that mattered, BlackRock won, and the mechanism that produced the win — liquidity in the products people accumulate into — is the same mechanism now protecting it.