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SPY@20: First US ETF Changed Investing

Olly Ludwig


[Editor’s Note:This story is the first of a “SPY@20” series of pieces IndexUniverse is rolling out this week and next to commemorate the 20 th anniversary of the first U.S.-listed ETF. The package will include a number of interviews with industry sources as well as blogs from IndexUniverse senior executives.]


“SPY,” the very first U.S.-listed exchange-traded fund and the biggest ETF in the world, turns 20 this month, a $125 billion portfolio that’s now in the company of some of the biggest U.S. mutual funds, making it the perfect symbol for an industry that’s on a roll.

SPY was seeded on Jan. 22, 1993, and began trading on Jan. 29—the latter date being the one that most in the ETF industry—including the fund’s sponsor, State Street Global Advisors—plan to mark as the special day that set in motion changes that continue to transform the money management industry to this day.

It’s a milestone that’s almost unbelievable to those who created the fund, officially known as the SPDR S'P 500 ETF (SPY). The ETF was dreamed up by the late Nate Most as a vehicle for traders that he hoped would help pump up volume at the American Stock Exchange. Most and his entourage thought they’d be lucky if SPY hauled in $1 billion.

SPY did indeed end up appealing to traders, and a whole lot more. The biggest ETF in the world now sits atop a universe of more than 1,400 ETFs that’s increasingly poaching market share from actively managed mutual funds. SPY casts a long shadow, making up about 9 percent of the record $1.403 trillion now invested in ETFs .

“SPY is a product that has really stood the test of time in a lot of ways, because if you think about it, for almost all of the 20 years, it’s been the largest ETF,” said Debbie Fuhr, an independent ETF analyst based in London.

“It’s been the most actively traded most of the time, and most years has also received the largest net new asset flows,” Fuhr added, stressing that the fact the fund has basically delivered—and continues to deliver—on its basic promises is a true testament to its value.

Much has changed since SPY launched in 1993, especially the money management industry itself.

Commission-based stock pickers have been supplanted by fee-based asset managers who view thoughtful asset allocation using low-cost vehicles—increasingly index ETFs—as the best way to deliver solid risk-adjusted returns at the right price—and with more tax efficiencies than actively managed mutual funds.



Fuhr also stressed a sort of back-to-the-future piece of the SPY tale that’s worth mentioning:Broad benchmarks like the S'P 500 Index, on which SPY is based, are more popular than ever, perhaps because the slicing and dicing of ETFs and indexing have made the simplicity of the S'P 500 more evident.

So when investors take solace in the fact that the S'P 500 is at five-year highs, they need only look at the price of SPY to take measure of the risk-on attitude that is increasingly taking hold in the world of investment. And that has only enhanced SPY’s appeal and resonance.

The Original Fee Warrior

It’s easy to take SPY for granted when one considers the so-called fee war that’s sweeping through the ETF industry these days. Companies like Charles Schwab, Vanguard and even BlackRock’s iShares may be getting all the headlines, touting increasingly low expense ratios.

But the fact is that SPY is still among the cheapest ETFs in the world, and really was designed that way at the outset, according to Kathleen Moriarty, a partner at Katten Muchin Rosenman LLP in New York, who wrote the SPY prospectus.

“Nate was very focused on price, and rightly so,” said Moriarty, whose early SPY exploits earned her the nickname “SPDR Woman ,” which she embraces with pride and good humor to this day. “He realized that institutions could get the same thing really cheaply elsewhere.”

Moriarty said SPY was priced at the outset at around 0.20 percent a year, or $20 for every $10,000 invested. That expense ratio has dropped to 0.0945 percent.

SPY’s expense ratio may not be as low as its direct competitors, the Vanguard S'P 500 ETF (VOO) and the iShares Core S'P 500 ETF (IVV), which cost 0.05 percent and 0.07 percent, respectively. But SPY is clearly in the category of ultra-low-priced funds, and it’s much cheaper than the typical actively managed mutual fund.

As a comparison, the cheapest institutional share class of Bill Gross' Pimco Total Return Fund (PTTRX)—a $285 billion portfolio that makes it the world’s biggest mutual fund—comes in with a no-load annual management fee of 0.46 percent, or almost five times as pricey as SPY.

The Fidelity Contrafund (FCNTX), a $52.82 billion equity fund, meanwhile costs 0.81 percent a year, or more than eight times as much as SPY.

What Does It All Mean?

For James Ross, who in 1993 was a fresh-faced new executive at State Street working on the team that brought SPY to market, the ETF literally changed his life.

Sure, there were dark moments in the early days, such as when SPY had net outflows in 1994. But as the concept caught on, Ross realized ETFs had huge potential, and he steered his career in that direction.



That’s significant, because State Street was and remains a lot more than an ETF company. It has big footprints in the worlds of institutional money management and custody services.

Ross, now global head of ETFs at State Street Global Advisors, made a prescient—or lucky—decision, as the SSgA ETF unit is truly thriving, hauling in assets at almost twice the rate of the entirety of its Boston-based parent, State Street Corp.

“Coming on SPY’s 20 th anniversary, I’ve been thinking a lot about how far it has come,” Ross said in an interview. “The broad implication of it is that, in the end, it’s not about State Street or Amex, it really is about helping the investor.”

“We have helped investors manage their risk and their portfolios, and invest in a way where they have broad diversification in a very timely way,” Ross added. “That piece of it really wasn’t an original expectation when we created SPY, but it’s one of the things we feel really good about.”

In the end, it’s no exaggeration to regard SPY as the leading edge of a trend that is literally turning the world of money management on its head.

Indeed, equity ETFs are now pulling in assets while equity mutual funds are losing assets . Total ETF assets at a record $1.4 trillion are still a fraction of total mutual fund assets of around $13 trillion, but a trend is in place and the writing does seem like it’s on the wall.

The low costs, intraday trading and tax efficiency are clearly winning over more and more advisors and investors, and it’s just a matter of time before the same into-ETFs-and-out-of-mutual-funds pattern of investment flows comes to the world of bonds as well, according to Dave Nadig, IndexUniverse’s director of research.

“Once you're on board with indexing, ETFs make vastly more sense as your choice of exposure for all the obvious reasons:cost, tax efficiency, liquidity and transparency,” Nadig said. “The ETF paradigm is just too compelling to stop, especially with increased capital gains tax rates.”

At the risk of descending into hyperbole, the story of SPY and of the ETF industry is very much about the evolution of capitalism. Old ideas die off, and new ideas take their place.

“The ETF business is basically the disruption to the mutual fund business,” Nicholas Colas, chief market strategist at ConvergEx Group, told IndexUniverse in a  recent interview . “And so SPY, 20 years ago, was the original wedge.”

Cinthia Murphy contributed to this article.

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