Wall Street Diversifies Itself

Exchange-traded funds are challenging the status quo in investment management—including who’s in charge.

Doug Chayka

Wall Street is an unlikely vanguard against corporate America’s diversity problem. The white shoes of investment management are still worn almost exclusively by white men. So it’s notable that the surging business of exchange-traded funds, or ETFs—investment funds that generally track an index like the S&P 500 and are traded on exchanges like stocks—looks a little different.

The demographics of this slice of the financial-services industry haven’t yet been studied. But I recently spoke with roughly a dozen women and people of color working in ETFs who say that they see more diversity in their business than elsewhere in finance—and the anecdotal evidence is convincing. While McKinsey reports that women represent only about 20 percent of senior vice presidents and vice presidents in asset management and institutional investment, Laura Morrison, the head of exchange-traded products at Bats Global Markets, says that women make up half of the team that works to get funds listed on Bats’s exchanges around the world. At iShares, the largest provider of ETFs in the world, which was acquired by the financial giant BlackRock in 2009, seven out of the 14 members of the global executive committee are women. A group called Women in ETFs, started three years ago by five prominent female executives, now counts more than 2,000 members.

Reggie Browne, the head of ETF trading at Cantor Fitzgerald—whom Forbes in 2012 dubbed the “Godfather of ETFs,” and who is himself African American—says that at least one woman or person of color holds a senior position at every ETF company or unit he knows of. Ben Johnson, who analyzes ETFs for Morningstar, says that compared with the rest of the investment-management field, the workforce “is somewhat more diverse.”

“Somewhat,” of course, isn’t a ringing endorsement. But consider the world we live in. Female representation in finance dropped slightly from 2000 to 2015, and a 2013 Government Accountability Office report found that in the U.S., black people held just 2.7 percent of senior positions in financial-services companies. Business Insider, after reviewing self-reported diversity metrics from six of the biggest Wall Street banks, reported in 2015 that more than 80 percent of executives were white and more than two-thirds of them were men.

Against this backdrop, ETFs stand out. And unlike many other parts of the finance industry since the crisis of 2008, they’ve also been wildly successful: Altogether, they now control more money than hedge funds do. It’s worth considering what might make the ETF business distinct—in hiring as well as performance—and whether the rest of the industry could catch on.

The ETF boom is part of a revolution in the way money is invested. The funds, most of which simply follow the performance of an index, represent a trend toward so-called passive management—a strategy that has begun to pose an existential threat to stock pickers. A study by S&P Dow Jones Indices found that from 2006 to mid-2016, 87 percent of all actively managed U.S. equity funds underperformed the market. ETFs also have the advantage of low fees, which average less than a third of those of actively managed mutual funds. In just over two decades, assets in ETFs have expanded to more than $2.5 trillion in the United States alone, making them one of the fastest-growing investment products in history.

What’s generally considered to be the first ETF in the U.S. was launched in 1993, when the American Stock Exchange and State Street created something called S&P Depositary Receipts, or SPDRs (pronounced “spiders”). Each share holds a stake in the 500 stocks represented by the S&P 500. Kathleen Moriarty, who worked at the law firm Orrick in the early 1990s, recalls a male partner’s assigning her to help with the legal work on SPDRs when he happened to stand next to her in the elevator. “Everyone thought [SPDRs were] a one-off,” she says. And because the field was new, “you didn’t have to work through several rounds of the organizational chart. People who gravitated to it were accepted.”

Today, Moriarty is a go-to lawyer for new ETFs. Her nickname in the industry is “Spider-Woman.” But back then, ETFs were considered marginal products. They were governed by arcane laws and didn’t carry the same star power as ventures like investment banking and trading. Deborah Fuhr, a prominent figure in the global ETF community who now runs a consulting firm called ETFGI, says the environment made space for women: “Men weren’t clamoring for those jobs, so women were able to take more senior roles.” Amy Schioldager, who was an early employee of iShares—the first business to market ETFs to retail investors—and now manages BlackRock’s worldwide ETF investments, says, “Honestly, it was just ‘We need someone to make this happen.’ ”

Many prominent women in the industry have gotten their start at iShares. The business was originally developed by Morgan Stanley and Barclays Global Investors in the mid-’90s under the leadership of Patricia Dunn. “It was a deeply entrepreneurial organization,” recalls Sue Thompson, a founder of Women in ETFs who worked at iShares until last spring, when she left to start her own consulting firm.

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Dunn was a strong supporter of women, and Thompson recalls times when the entire slate of interviewers for a prospective hire would be made up of women. “My boss was a woman, and my boss’s boss was a woman, and her boss’s boss’s boss was a woman!” says Marie Dzanis, another early employee. (Dunn, whose legacy was tarnished by her involvement in a spying campaign at Hewlett-Packard when she was chairman of that company’s board, died of ovarian cancer in 2011. The Wikipedia description of iShares does not mention her, instead giving full credit to two men who helped develop the business.)

One thing that distinguished Dunn’s leadership was that she didn’t merely mentor other women; she sponsored them. Mentorship generally entails offering advice without much at stake for the advice giver. Sponsorship, says Lori Heinel, the deputy global chief investment officer at State Street, is “a willingness to risk your own political capital to push someone along or pull someone up.” Many big promotions require sponsorship, and typically, men sponsor other men. As a report by the consulting firm Oliver Wyman puts it, “It is more difficult for women to find a sponsor in their organization, with few having senior colleagues pushing them up to the next career level.”

Sponsorship is a large part of the thinking behind Women in ETFs—which is also open to men, who account for about 10 percent of its members. (Reggie Browne is a member.) Roughly a quarter of the members rank as senior vice presidents or higher, and local chapters are designed to let rising women take on leadership roles and meet possible sponsors outside their own companies.

It’s not an accident that these practices took hold in an area where white men hadn’t already staked their claim, where the rules of the game weren’t already defined, and where the career path wasn’t seen as prestigious. Browne—who recently helped Cantor Fitzgerald start an internship program for graduates of historically black colleges and universities—points out that in the nascent ETF business, there was “no old boys’ network that holds people down.” ETFs “don’t have this 100-year history of what the people in charge look like,” says Sue Thompson. “There is more opportunity for the smartest, the brightest, those with the most interesting vision.”

Many of these factors—the entrepreneurialism, the newness, the growth—would also seem to apply to Silicon Valley, where the lack of both gender and racial diversity has been well chronicled. But as Lori Heinel points out, in Silicon Valley, where there’s a higher concentration of stem careers, “there’s a heavy reliance on an educational background skill set that is classically more male.” For ETFs, on the other hand, much of the infrastructure is in marketing, sales, and relationship management, roles that leave openings for those who are ambitious, talented, and hardworking—even if they don’t have a specific set of technical skills.

What will happen as ETFs go mainstream? Big firms including Goldman Sachs, JP Morgan, and New York Life have started to acquire ETF units or launch their own, and the upstart business is meeting the traditional culture of Wall Street.

Shundrawn Thomas, who helped launch ETFs at Northern Trust and is now part of the firm’s asset-management leadership team, says that he is often the only African American participating on industry panels with others at the executive level. As he has moved up the ranks, he says, “I’m not sitting around the table with a whole lot of diversity.” And while it might seem that absorbing a diverse ETF team would eventually affect the makeup of a firm’s management structure, change doesn’t necessarily trickle up. As Amy Schioldager, who is retiring from BlackRock this year, puts it, “We all know senior women beget senior women.” Seniority is a relative concept, and when big firms acquire smaller ones, the culture of the big firm is likely to prevail. More than seven years after acquiring iShares, BlackRock still has few women in line for top corporate jobs.

Yet women and people of color have some forces on their side—notably customers. Pension plans are a big source of capital for the asset-management industry, and Reggie Browne points out that several state-employee retirement systems now monitor gender and racial diversity among their investment managers. If you can’t meet their requirements, he says, “you are done.” Last winter, State Street launched an ETF called she, to track the performance of big companies that have high levels of gender diversity on their boards and among their senior leadership. The California State Teachers’ Retirement System made an initial investment of $250 million in she on the basis of research showing that increasing a company’s diversity leads to higher returns.

The growing recognition that more-diverse teams perform better—possibly even better than teams with high IQs, research has suggested—is giving big firms a financial incentive, not just a moral imperative, to move the needle. As a McKinsey study reported last year, “Companies’ commitment to gender diversity is at an all-time high, but they are struggling to put their commitment into practice.” The GAO noted a similar problem with racial diversity. That it isn’t easy is all the more reason to look to the ETF business as an example.