ETFs Mark 20th Anniversary: A Look at the Market’s Hottest New Product

On a cold January day 20 years ago, with the Dow Jones Industrial Average hovering at about 3,300, a team of investors from State Street Bank (STT) unveiled their new creation to the denizens of Wall Street: the SPDR S&P 500 ETF (SPY). They now describe the launch of the first exchange-traded fund (ETF) on this day in 1993 as "the one that started it all," calling the debut of the Spider (short for S&P Depositary Receipt) "an investment product that gave people a more precise way to buy and sell an entire index, but could be traded like a stock."

It took some time for ETFs to catch on, but when they did the once lonesome Spider paved the way for what is now a $1.4 trillion industry with more than 1,400 different funds.

"This little group — little think tank — at State Street said, 'Let's create this thing that might help trading the S&P 500,'" says Tom Lydon, editor of ETF Trends.com, in the attached video. Despite its catchy name, he says ETFs took a long time to catch on, "years and years and years." Today investors not only know what ETFs are, but they love them to the point where Lydon says they're "threatening mutual funds to a great degree."

To be fair, the traditional mutual fund business is still about 10 times as big, in terms of assets, but ETFs are clearly gaining ground fast. Recent fund flow data, for example, showed $18 billion of cash was poured into equity funds in the first week of the new year, with 60% of the new money going into equity ETFs and the rest into mutual funds.

While some say the ETF or ETP (exchange-traded product) business is starting to feel saturated, Lydon says there is still enormous room for future innovation and growth, especially if and when ETFs find their way into 401k retirement plans.

"There are a lot of tools" to pick from, explains Lydon. The current breadth of products ranges from indexes to currencies to volatility to commodities to sectors and more. He adds that "there's a lot of things to shoot yourself in the foot with, too."

Also helping the growth of ETFs, Lydon says, is the fact that indexing has gone from 7% of investments to 20% in just 10 years. It's a trend that shows "the average investor is fed up" with actively managed funds falling short of the indexes they're supposed to beat.