A brief history of exchange-traded funds

News Flash December 13, 2021, 1:10 pm Eastern Standard Time: According to data from the investment research company Morningstar, as of November 2021, the global net inflow of ETFs has exceeded US$1 trillion so far this year. This is the first time that ETFs have reached this milestone.

Exchange-traded funds (ETFs) have become one of the most popular investment tools for institutional and individual investors. ETFs are often advertised as cheaper and better than mutual funds, providing investors with low-cost diversification, trading and arbitrage options.

Now, as ETFs often boast of managing billions of dollars in assets, the number of new ETFs launched in any given year ranges from tens to hundreds. ETFs are so popular that many brokers offer their clients free trading of a limited number of ETFs.

Key points

  • Exchange-traded funds (ETFs) were originally developed in the 1990s to provide individual investors with access to passive index funds.
  • Since its establishment, the ETF market has developed rapidly and is now used by various investors and traders around the world.
  • ETFs now represent everything from broad market indexes to niche industries or alternative asset classes.

Index investment

ETF was originally a product of the index investment phenomenon. The idea of ​​index investment goes back a long time: occasionally trusts or closed-end funds are created to give investors the opportunity to invest in specific types of assets.

However, these are not like the ETFs we are talking about now. In response to academic research showing the advantages of passive investment, Wells Fargo and National Bank of America both launched index mutual funds for institutional clients in 1973.Mutual fund legend John Bogle will follow suit in a few years, launching the first public index mutual fund on December 31, 1975. The fund is called the First Index Investment Trust Fund, which tracks the Standard & Poor’s 500 Index and started with only $11 million in assets.Derided by some as “Bogle’s stupidity”, the assets of the fund (now known as the Vanguard 500 Index Fund) were $441 billion at the time of Bogle’s death in 2019.of

Once it is clear that the investing public is interested in such index funds, there is a race to make it easier for the investing public to obtain this type of investment-because mutual funds are usually expensive, complex, and illiquid, and many funds require a minimum investment amount. ETFs and passive management Like mutual funds, they usually try to track the index by using a computer, and they also aim to imitate the market.

ETF is born

According to Gary Gastineau, author of the Exchange Traded Funds Handbook, the first real attempt at ETFs was the introduction of S&P 500 participating stocks in 1989. Unfortunately, despite considerable investor interest, a federal court in Chicago ruled that the fund operates like a futures contract, even though they are marginalized and mortgaged like stocks; therefore, if you want to trade them, you must Futures exchanges trade, and the emergence of real ETFs will take some time.

The next attempt to create a modern exchange-traded fund was initiated by the Toronto Stock Exchange in 1990, called the Toronto 35 Index Participating Units (TIPs 35). These are receipt-based warehouse tools that track the TSE-35 index.

Three years later, State Street Global Investors released the Standard & Poor’s 500 Trust ETF (SPDR or “Spider”) on January 22, 1993. It was very popular at the time and is still one of the most actively traded ETFs. Although the first US ETF was launched in 1993, it took another 15 years before the first actively managed ETF entered the market.

Barclays entered the ETF business in 1996, and Vanguard began offering ETFs in 2001. As of February 2021, there are 160 different ETF issuers.

The growth of an industry

The ETF market has grown from one fund in 1993 to 102 funds in 2002, and it was close to 1,000 by the end of 2009. According to data from the research company ETFGI, there were more than 7,100 ETF transactions worldwide in May 2020. (If you include exchange-traded notes, a much smaller category, there are nearly 1,000 in the world).

In the process, an interesting “competition” began between ETFs and traditional mutual funds. 2003 was the first year that ETF net inflows exceeded mutual fund net inflows. Since then, in years when market returns have been positive, mutual fund inflows have generally exceeded ETF inflows, but in years when major markets are weak, ETF net inflows have tended to be higher.

Some important ETF examples

As we mentioned, the first ETF (S&P 500 SPDR) was established on January 23, 1993. The fund’s assets under management in February 2021 exceeded 328 billion U.S. dollars, and its stock trading price was approximately 386 U.S. dollars.

The second largest ETF, the iShares Core S&P 500 ETF (NYSE: IVV), began trading in May 2000. The fund’s assets under management in February 2021 exceeded 243 billion U.S. dollars, with an average monthly trading volume of 4.5 million shares per day.

iShares MSCI EAFE ETF (NYSE: EFA) is the largest foreign equity ETF. Education for All was launched in August 2001 and has assets of approximately US$53.5 billion as of February 2021.

Invesco QQQ (NYSE: QQQ) imitates the Nasdaq 100 index and holds approximately US$157 billion in assets in February 2021. The fund was launched in March 1999.

Last but not least, the Bloomberg Barclays TIPS (NYSE: TIP) fund began trading in December 2003, and by February 2021, it has more than $27 billion in assets under management.

Bottom line

Although ETFs do provide very convenient and affordable exposure to a large number of markets and investment categories, they are increasingly being blamed as a source of additional market volatility. However, such criticism is unlikely to slow their growth significantly, and the importance and influence of these tools seems to only grow in the next few years.


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