First ETF Turns 30yrs Old. Revolutionizing Low-Cost, Index Investing
30yrs ago this week, State Street Global Advisors launched the ETF, SPY. This was the 1st US-based ETF, which tracks the S&P 500 index.
Today, that same ETF is known as SPDR S&P 500 ETF Trust, or just "Spider." It's the largest ETF in the world with over $370 billion in assets under management, and is also the most actively traded.
How ETF's differ from mutual funds
Holding an investment in an ETF has many advantages over a mutual fund.....
1. Trades intraday, just like a normal stock
2. Has no minimum purchase requirement. You'll run into this every now-and-again with mutual funds
3. Has annual fees that are lower than most comparable mutual funds
4. Are mostly more tax efficient than mutual funds
For a product that would revolutionize the trading world, ETF's didn't start off too well though....
Vanguard founder Jack Bogle had launched the first index fund, the Vanguard 500 Index Fund, 17yrs prior, in 1976. Wall Street wasn't in love with a low-cost index fund and didn't take kindly to the same premise regarding ETF's....at first.
There was just too much resistance to change at the time - nobody likes change. Even more-so if it could take money from your pocketbook.
It was retail investors who began buying ETF's through discount brokers that helped the investment product break out.
Success for ETF's certainly took time though. By 1996, as the Dotcom era started, ETF's as whole had only $2.4 billion in assets under management. In 1997, there were a measly 19 ETF's in existence. By the year 2000, there were still only 80.
So....what happened, you ask?
Just the right product at the right time
While it started off slowly, the ETF business came along at the right moment. It's growth was aided by a confluence of 2 events.
1) Growing awareness that indexing was a superior way of owning the market over stock picking.
2) The explosion of the internet and Dotcom era, which helped the S&P 500 rocket up an average of 28% a year between 1995 and 1999.
By 2000, ETF's had $65 billion in assets, by 2005 $300 billion, and by 2010 $991 billion.
The Dotcom bust 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 equities, into bonds and then commodities.
On Nov 18, 2004, the StreetTracks Gold Shares (now SPDR Gold Shares, GLD) went public. This represented a leap in making gold more widely available. The gold was held in vaults by a custodian. It tracked gold prices well, though as with all ETF's, there was a fee (currently at 0.4%). It could be bought and sold in a brokerage account, and even traded intraday.
Staying in low-cost, well-diversified funds with low turnover and tax advantages, ETF's gained even more traction after the Great Financial Crisis in 2008-2009, which convinced more investors that trying to beat the markets was almost impossible, and that high-cost funds ate away at any market-beating returns most funds could claim to make.
ETF's - Are they poised to take over mutual funds?
After pausing during the Great Financial Crisis, ETF assets under management took off and have been more than doubling roughly every 5yrs.
The Covid pandemic pushed even more money into ETF's, the vast majority into index-based products like those tied to the S&P 500.
From a measly 80 ETF's in 2000, there are roughly 2,700 ETF's operating in the US today, worth about $7 trillion.
The mutual fund industry still has significantly more assets (about $23 trillion), but that gap is closing pretty fast.
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*Nothing discussed in this blog post should be construed as investment advice. Each situation is unique and you need to receive professional advice from independent fee-only financial advisor that's familiar with higher ed retirement plans prior to implementing any strategies discussed or thought of on your own.
**S&A Financial Services, Inc. is a registered investment advisor. Content presented is for informational purposes only and should not be considered as investment advice or as an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Always consult with your tax advisor or attorney regarding your specific situation.