(An excerpt from the book, “Shut Up and Keep Talking: Lessons on Living and Investing from the Floor of the New York Stock Exchange,” by Bob Pisani.)
Thirty years ago this week, State Street Global Advisors launched 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 the SPDR S&P 500 ETF trust, or simply “SPDR” (pronounced “Spider”). It is the largest ETF in the world with more than $370 billion in assets under management, and is also the most actively traded, routinely trading more than 80 million shares per day with dollar volume exceeding $32 billion per day.
How ETFs differ from mutual funds
Investing in an ETF structure has many advantages over an investment fund.
- Can be traded intraday just like a stock.
- Has no minimum purchase requirement.
- Has annual fees that are lower than most comparable mutual funds.
- Are tax-efficient than an investment fund.
Not a good start
For a product that would eventually change the investing world, ETFs got off to a bad start.
Vanguard founder Jack Bogle had launched the first index fund 17 years earlier, in 1976, the Vanguard 500 Index Fund.
The SPDR encountered a similar problem. Wall Street was not in love with a cheap index fund.
“There was tremendous resistance to change,” said Bob Tull, who was developing new products for Morgan Stanley at the time and was a key figure in ETF development.
The reason was that mutual funds and broker-dealers quickly realized that there was little money in the product.
“There was a small asset management fee, but the Street hated it because there was no annual shareholder fee,” Tull told me. “The only thing they could charge was commission. There was also no minimum amount, so they could have gotten a $5,000 ticket or a $50 ticket.”
It was private investors, who started buying through discount brokers, who helped break the product.
But success took a long time to come. In 1996, when the Dotcom era began, ETFs as a whole only had $2.4 billion in assets under management. In 1997 there were no less than 19 ETFs. In 2000 there were only 80.
So what happened?
The right product at the right time
Although slow to start, the ETF business came at the right time.
Growth was supported by a confluence of two events: 1) the growing realization that indexing was a better way to own the market than stock picking; and 2) the explosion of the Internet and the Dotcom phenomenon, which caused the S&P 500 to rise an average of 28% per year between 1995 and 1999.
ETFs had assets of $65 billion in 2000, $300 billion in 2005, and $991 billion in 2010.
The Dotcom crisis slowed down the entire financial sector, but within a few years the number of funds started to increase again.
The ETF business soon expanded from stocks, to bonds, and then into commodities.
On November 18, 2004, the StreetTracks Gold Shares (now called SPDR Gold Shares, symbol GLD) went public. It represented a great leap forward in making gold more widely available. The gold was kept in vaults by a custodian. It followed gold prices closely, although as with all ETFs there was a fee (currently 0.4%). It can be bought and sold in a brokerage account and even traded intraday.
CNBC’s Bob Pisani on the floor of the New York Stock Exchange in 2004 discussing 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-advantaged funds (ETFs) gained even more support after the Great Financial Crisis in 2008-2009, which convinced more investors that it was nearly impossible to beat the markets, and that high-cost funds ate away at any market-based returns that most funds could claim to deliver.
ETFs: Ready to Take Over the Mutual Funds?
After a lull during the Great Financial Crisis, ETF assets under management boomed, more than doubling roughly every five years.
The Covid pandemic pushed even more money into ETFs, the vast majority into index-based products like those linked to the S&P 500.
Of the meager 80 ETFs in 2000, about 2,700 ETFs are active in the US, worth about $7 trillion.
The mutual fund industry still has significantly more assets (about $23 trillion), but that gap is rapidly shrinking.
“ETFs are still the largest growing asset wrapper in the world,” said Tull, who has built 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 SPDR ETF Business at State Street Global Advisors, will be on Halftime Report Monday at 12:35 p.m. and Monday at 3 p.m. on ETFedge.cnbc.com.