The first ETF turns 30 this week. Launched a low-cost investment revolution
(excerpt from the book, “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Exchange,” By Bob Pisani.)
Thirty years ago this week, State Street Global Advisors launched the Standard & Poor’s Depositary Receipt (SPY), the first US-based exchange-traded fund (ETF), to track the S&P 500.
Today, it is known as SPDR S&P 500 ETF Trust, or just “SPDR” (pronounced “Spider”). It’s the world’s largest ETF with more than $370 billion in assets under management, and it’s also the most actively traded, with more than 80 million shares traded daily routinely with a volume north of $32 billion per day.
How are ETFs different from mutual funds?
Investing in an ETF structure has several advantages over a mutual fund.
- They can be traded during the day, just like stocks.
- There is no minimum purchase requirement.
- It has lower annual fees than most similar mutual funds.
- More tax efficient than a mutual fund.
Not a great start
For a product that will end up changing the investment world, ETFs started out badly.
Vanguard founder Jack Bogle launched the first index fund, the Vanguard 500 Index Fund, 17 years ago, in 1976.
SPDR ran into a similar problem. Wall Street wasn’t fond of a low-cost index fund.
“There was tremendous resistance to change,” Bob Tull, who was developing new products for Morgan Stanley at the time and was a key figure in the development of ETFs, told me.
The reason was that mutual funds and brokers quickly realized there was little money in the product.
“There was a small asset management fee, but the Street hated it because there was no annual service fee for shareholders,” Toole told me. “The only thing they could charge was a commission. There was also no minimum amount, so they could get a $5,000 or $50 ticket.”
It was retail investors, who started buying through discount brokers, who helped spread the product.
But success took a long time. By 1996, as the dotcom era began, ETFs as a whole had only $2.4 billion in assets under management. In 1997, there were 19 ETFs. By the year 2000, there were still only 80.
so what happened?
The right product at the right time
While it started slowly, the ETF’s work came at the right time.
Its growth was aided by a confluence of two events: 1) A growing awareness that indexing was an excellent way to own the market over stock picking. 2) The Internet explosion and the dotcom phenomenon, which helped the S&P 500 skyrocket at an average rate of 28% annually between 1995 and 1999.
By 2000, ETFs had $65 billion in assets, by 2005 $300 billion, and by 2010 $991 billion.
The dotcom crash slowed down the entire financial industry, but within a few years, the number of funds began to increase again.
The ETF business soon expanded beyond stocks, into bonds and then commodities.
On November 18, 2004, shares of StreetTracks Gold (now called SPDR Gold Stock, GLD code) to the public. It represented a quantum leap in making gold more widely available. The gold is placed in vaults by the custodian. I tracked gold prices well, although there is a fee (currently 0.4%) as with all ETFs. They can be bought and sold in a brokerage account, and even traded during the day.
CNBC’s Bob Pisani on the floor of the New York Stock Exchange in 2004 covering the launch of the StreetTRACKS Gold Shares ETF, or GLD, now known as the SPDR Gold Trust.
Staying in low-cost, well-diversified low-turnover, tax-advantage funds (ETFs) gained more followers after the Great Financial Crisis of 2008-2009, which convinced more investors that trying to beat the markets was nearly impossible, and that high-cost money consumed any Market-damaging returns most funds can claim to make.
ETFs: Are You Ready to Take Over From Mutual Funds?
After stalling during the Great Financial Crisis, the ETF’s assets under management took off and doubled approximately every five years.
The Covid pandemic has pushed more money into ETFs, the vast majority in index-based products like those tied to the S&P 500.
Of the 80 ETFs in 2000, there are approximately 2,700 ETFs operating in the United States, worth about $7 trillion.
The mutual fund industry still has a lot more assets (about $23 trillion), but that gap is closing fast.
“ETFs continue to be the largest and growing purpose-built group of assets in the world,” said Toole, who has established ETFs in 18 countries. “It’s the only product that regulators trust because of its transparency. People know what they’re getting the day they buy it.”
Note: Rory Tobin, Global Head of ETF ETF SPDR Business at State Street Global Advisors, will be reporting half-time Mondays at 12:35pm and again at 3pm Mondays on ETFedge.cnbc.com.