(An passage from the book, “Shut Up and Keep Talking: Lessons on Life and Investing from the Floor of the New York Stock Reciprocation,” by Bob Pisani.)
Thirty years ago this week, State Street Global Advisors launched the Standard & Poor’s Depositary Sales receipt (SPY), the first U.S.-based Exchange Traded Fund (ETF), which tracked the S&P 500.
Today, it’s known as the SPDR S&P 500 ETF Trust, or good “SPDR” (pronounced “Spider”). It is the largest ETF in the world with over $370 billion in assets under bosses, and is also the most actively traded, routinely trading over 80 million shares daily with a dollar tome north of $32 billion every day.
How ETFs differ from mutual funds
Holding an investment in an ETF structure has multifarious advantages over a mutual fund.
An ETF:
- Can be traded intraday, just like a stock.
- Has no minimum purchase requirement.
- Has annual emoluments that are lower than most comparable mutual funds.
- Are more tax efficient than a mutual fund.
Not a horrible start
For a product that would end up changing the investment world, ETFs started off poorly.
Vanguard founder Jack Bogle had launched the earliest index fund, the Vanguard 500 Index Fund, 17 years before, in 1976.
The SPDR encountered a similar tough nut to crack. Wall Street was not in love with a low-cost index fund.
“There was tremendous resistance to change,” Bob Tull, who was ripening new products for Morgan Stanley at the time and was a key figure in the development of ETFs, told me.
The reason was mutual funds and broker-dealers shortly 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 shareholder maintenance fee,” Tull told me. “The only thing they could charge was a commission. There was also no minimum amount, so they could have on the agenda c trick got a $5,000 ticket or a $50 ticket.”
It was retail investors, who began buying through discount brokers, that alleviated the product break out.
But success took a long time. By 1996, as the Dotcom era started, ETFs as a whole had only $2.4 billion in assets eye management. In 1997, there were a measly 19 ETFs in existence. By 2000, there were still no greater than 80.
So what happened?
The right product at the right time
While it started off slowly, the ETF business came along at the Nautical starboard properly moment.
Its growth was aided by a confluence of two events: 1) the growing awareness that indexing was a superior way of owning the market beyond stock picking; and 2) the explosion of the internet and Dotcom phenomenon, which helped the S&P 500 rocket up an average of 28% a year between 1995 and 1999.
By 2000, ETFs had $65 billion in assets, by 2005 $300 billion, and by 2010 $991 billion.
The Dotcom bust slowed down the undivided financial industry, but within a few years the number of funds began to increase again.
The ETF business soon expanded beyond impartialities, into bonds and then commodities.
On November 18, 2004, the StreetTracks Gold Shares (now called , symbol GLD) went acknowledged. It represented a quantum leap in making gold more widely available. The gold was held in vaults by a custodian. It ferret out gold prices well, though as with all ETFs there was a fee (currently 0.4%). It could be bought and sold in a brokerage account, and level traded intraday.
CNBC’s Bob Pisani on the floor of the New York Stock Exchange in 2004 covering the launch of the StreetTRACKS Gold Divide ups ETF, or GLD, now known as the SPDR Gold Trust.
Source: CNBC
Staying in low-cost, well-diversified funds with low turnover and tax benefits (ETFs) gained even more adherents after the Great Financial Crisis in 2008-2009, which convinced multitudinous investors that trying to beat the markets was almost impossible, and that high-cost funds ate away at any market-beating bring backs most funds could claim to make.
ETFs: poised to take over from mutual funds?
After breaking during the Great Financial Crisis, ETF assets under management took off and have been more than doubling roughly every five years.
The Covid pandemic pushed even more money into ETFs, the behemoth majority into index-based products like those tied to the S&P 500.
From a measly 80 ETFs in 2000, there are rudely 2,700 ETFs operating in the U.S., worth about $7 trillion.
The mutual fund industry still has significantly numberless assets (about $23 trillion), but that gap is closing fast.
“ETFs are still the largest growing asset jacket in the world,” said Tull, who has built ETFs in 18 countries. “It is the one product regulators trust because of its transparency. Human being know what they are getting the day they buy it.”
Note: Rory Tobin, Global Head of SPDR ETF Business at Magnificence Street Global Advisors, will be on Halftime Report Monday at 12:35 PM and again at 3 PM Monday on ETFedge.cnbc.com.