State Street Corporation (ticker symbol: STT) is a titan of the financial world, though you may not know its name as well as you know Goldman Sachs or J.P. Morgan. Headquartered in Boston, it's one of the oldest and largest financial institutions in the United States. State Street operates primarily as a massive financial “plumber,” providing essential back-office services for the global investment industry. Its core business is not lending money like a traditional bank, but rather safeguarding and administering financial assets for huge institutional clients. Think of it as the ultimate bookkeeper and safe-keeper for pension funds, mutual funds, and governments. As one of the world's leading custodian banks, it holds trillions of dollars in assets. At the same time, its investment management arm, State Street Global Advisors (SSGA), is a giant asset manager in its own right, famous for creating the very first Exchange-Traded Fund (ETF) in the U.S., which revolutionized investing for millions of ordinary people.
State Street’s business is built on two complementary foundations: investment servicing and investment management. While one is a behind-the-scenes powerhouse, the other is a famous innovator.
This is the less glamorous but hugely dominant side of State Street's business. As a custodian bank, its main job is to hold clients' assets for safekeeping to prevent them from being lost or stolen. But it does much more than just store securities. Its services are the essential plumbing that makes the global investment industry work.
This business generates fees based on the value of Assets under Custody and/or Administration (AUC/A). Because its clients are massive institutions, the switching costs of moving trillions of dollars to a competitor are enormous, giving State Street a very sticky and reliable revenue stream.
This is the more public-facing side of the company, operated through its subsidiary, State Street Global Advisors (SSGA). SSGA is one of the largest asset managers in the world, managing trillions in Assets under Management (AUM). Its greatest claim to fame is the creation of the SPDR S&P 500 ETF (SPY) in 1993. Affectionately known as “Spider,” it was the first ETF listed in the United States and it completely changed the investment landscape. For the first time, an ordinary investor could buy and sell a basket of stocks representing the entire S&P 500 index with a single trade, just like a common stock. This innovation brought low-cost, diversified index investing to the masses. Today, SSGA manages a huge family of SPDR ETFs, competing directly with firms like BlackRock (iShares) and Vanguard.
For a value investor, State Street presents an interesting case. It’s a “toll road” business that profits from the overall activity and growth of financial markets, rather than betting on their direction.
State Street possesses a wide economic moat, or a durable competitive advantage, that protects its long-term profits.
No investment is without risk. While State Street doesn't take on credit risk like a commercial bank, investors should be aware of several factors:
In 2017, on the eve of International Women's Day, State Street Global Advisors installed a bronze statue of a small, defiant girl staring down the famous “Charging Bull” statue near Wall Street. Called Fearless Girl, the statue was commissioned to draw attention to the lack of women on corporate boards and to promote SSGA's gender diversity index fund. The statue became an instant global sensation and a symbol of female empowerment, proving that even a centuries-old financial institution can make a powerful cultural statement.