(Excerpted 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.)
30 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 simply “SPDR” (pronounced “spider”). It’s the largest ETF in the world, with over $370 billion in assets under management, and also the most actively traded, routinely trading over 80 million shares daily with over $32 billion in dollar volume.
How ETFs differ from mutual funds
Holding an investment in an ETF structure has many advantages over a mutual fund.
- Can be traded intraday like a stock.
- Has no minimum order quantity.
- Has lower annual fees than most comparable mutual funds.
- Are tax efficient than a mutual fund.
Not a good start
ETFs got off to a bad start for a product that would ultimately change the world of investing.
Vanguard founder Jack Bogle launched the first index fund, the Vanguard 500 Index Fund, 17 years earlier in 1976.
The SPDR encountered a similar problem. Wall Street wasn’t in love with a low-cost index fund.
“There was tremendous resistance to change,” Bob Tull, who was then developing new products for Morgan Stanley and was a key figure in the development of ETFs, told me.
The reason was mutual funds, and broker-dealers quickly realized that there was little money in the product.
“There was a small wealth management fee, but the Street hated it because there was no annual shareholder service fee,” Tull told me. “The only thing they could charge was a commission. Also, there was no minimum amount, so they could have gotten a $5,000 ticket or a $50 ticket.”
It was retail investors who started buying through discount brokers that helped the product take off.
But success was a long time coming. By 1996, when the dot-com era began, ETFs had just $2.4 billion in total assets under management. In 1997 there were a meager 19 ETFs. In 2000 there were still 80.
So what happened?
The right product at the right time
While it started slowly, the ETF business came at just the right moment.
Its growth was aided by the coincidence of two events: 1) a growing awareness that indexing is a better way to dominate the market than stock picking; and 2) the explosion of the Internet and dot-com phenomenon, which helped the S&P 500 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 dot-com bust slowed down the entire financial industry, but within a few years the number of funds started to grow again.
The ETF business soon expanded beyond stocks into bonds and then commodities.
On November 18, 2004, the StreetTracks Gold Shares (now called SPDR Gold Stocks, symbol GLD) went public. It represented a quantum leap in making gold more widely available. The gold was kept in vaults by a steward. It tracked the price of gold well, although like all ETFs there was a fee (currently 0.4%). It could 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 about 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 and tax-benefit funds (ETFs) gained even more supporters after the Great Financial Crisis of 2008-2009, which convinced more investors that it was almost impossible to beat the markets, and that high – Cost funds gobbled up all the market-beating returns most funds could claim.
ETFs: ready to replace mutual funds?
After a lull during the Great Financial Crisis, ETF assets under management have grown and have more than doubled about every five years.
The Covid pandemic has pumped even more money into ETFs, the vast majority in index-based products like those linked to the S&P 500.
Out of a meager 80 ETFs in 2000, there are about 2,700 ETFs in the US, worth about $7 trillion.
The mutual fund industry still has significantly more assets (about $23 trillion) but that gap is closing fast.
“ETFs continue to be the fastest-growing wealth 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 are getting the day they buy it.”
Note: Rory Tobin, Global Head of SPDR ETF Business at State Street Global Advisors, will appear on ETFedge.cnbc.com for the mid-term report on Monday at 12:35 p.m. and Monday at 3:00 p.m.