(An excerpt from the book, “Shut up and keep talking: Lessons on life and investing from the stage of the New York Stock Exchange,” By Bob Pisani.)
Thirty years ago this week, State Street Global Advisors launched the Standard & Poor’s Depository Receipt (SPY), the first US-based exchange traded fund (ETF) that tracked the S&P 500.
Today it is known as SPDR S&P 500 ETF Trust, or simply “SPDR” (pronounced “spider”). It is the world’s largest ETF with over $370 billion in assets under management, and it is also the most actively traded, with over 80 million shares regularly traded daily and dollar volume of $32 per day. exceeds a billion.
How are ETFs different from mutual funds?
Holding investments in an ETF structure has several advantages over mutual funds.
An ETF:
- Like stocks, they can be traded intraday.
- There is no minimum purchase requirement.
- Its annual fees are lower than most comparable mutual funds.
- Are more tax efficient than mutual funds.
not a good start
For a product that would change the world of investing, ETFs got off to a bad start.
Vanguard founder Jack Bogle launched the first index fund, the Vanguard 500 Index Fund, 17 years earlier in 1976.
SPDR faced a similar problem. Wall Street wasn’t in love with low-cost index funds.
“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 the ETF, told me.
This was because mutual funds and broker-dealers quickly realized that there was very little money to be made in the product.
“There was a small asset management fee, but the Street hated it because there was no annual shareholder servicing fee,” Tull told me. “The only thing they could take was commission. There was no minimum amount, so they could get a $5,000 ticket or a $50 ticket.”
It was retail investors who started buying through discount brokers, which helped the product take off.
But it took a long time to achieve success. By 1996, as the dotcom era began, ETFs overall had only $2.4 billion in assets under management. In 1997, only 19 ETFs existed. By 2000, there were still only 80.
So what?
right product at the right time
Although it had a slow start, the ETF business came at the right time.
Its growth was aided by the confluence of two events: 1) growing awareness that indexing was a better way to capture the market than stock picking; and 2) the explosion of the Internet and the dotcom phenomenon, which helped the S&P 500 rocket up an average of 28% per year between 1995 and 1999.
ETF assets were $65 billion by 2000, $300 billion by 2005, and $991 billion by 2010.
The dotcom recession slowed down the entire financial industry, but within a few years the number of funds began to grow again.
ETF trading soon expanded beyond equities into bonds and then commodities.
On November 18, 2004, StreetTrax Gold Shares (now known as spdr gold shares, symbol GLD) went public. This represented a huge leap forward in making gold more widely available. The gold was kept in safes by a custodian. It tracked gold prices well, although like all ETFs it had a fee (currently 0.4%). It can be bought and sold in a brokerage account, and even traded intraday.
On the stage of the New York Stock Exchange in 2004, CNBC’s Bob Pisani covered the launch of the StreetTrax Gold Shares ETF, or GLD, now known as the SPDR Gold Trust.
Source: CNBC
The persistence of low-cost, well-diversified funds with low turnover and tax advantages (ETFs) gained even more followers after the great financial crisis in 2008–2009, which convinced more investors that there was a way to beat the markets. It’s almost impossible to try, and those high-cost funds lose out on any market-beating returns that most funds can claim.
ETFs: Are you ready to take over from a mutual fund?
After stalling during the Great Financial Crisis, ETF assets under management boomed and more than doubled every five years.
The Covid pandemic drove even more money into ETFs, much of which invested in index-based products tied to the S&P 500.
From only 80 ETFs in 2000, there are approximately 2,700 ETFs operating in the US, worth approximately $7 trillion.
The mutual fund industry still has significantly more assets (about $23 trillion), but the gap is closing rapidly.
“ETFs are still the fastest-growing asset in the world,” said Tull, who creates ETFs in 18 countries. “This is a product that regulators trust because of its transparency. People know what they are getting the day they buy it.”
Note: Rory Tobin, global head of SPDR ETF business at State Street Global Advisors, will appear on Monday’s Halftime Report at 12:35 p.m. and again on Monday at 3 p.m. on ETFedge.cnbc.com.
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