The first Exchange Traded Fund – the “Standard & Poor’s Depository Receipts Trust,” nicknamed “Spider” – was born 25 years ago this month. It allowed investors to buy or sell the S&P 500 index in a single publicly-traded share for the first time.
Five years later, StateStreet created ETF’s that allowed individuals to invest in companies in specific industry sectors, like “Technology” or “Financial Services” or “Energy.”
ETF’s have distinct advantages over mutual funds, namely:
- Expense ratios that are 89% lower.
- Greater tax efficiency.
- The freedom to buy or sell throughout the trading day.
Investors took note and began to direct more of their savings to ETF’s. In response, financial institutions have been launching more and more varied ETF’s. There are ETF’s that invest in bonds, commodities, currencies and individual countries. There are even “leveraged” ETF’s that return +2% for every +1% the market grows. (On the downside, they also return a negative 2% for every 1% the market drops, so invest in these cautiously!)
Over the last decade, the amount invested in ETF’s worldwide has grown by a factor of 5.5x, from $857 billion to $4.8 trillion. All told, there are more than 7,100 ETF’s worldwide and their market share has grown from 3% to 10%. As advisers and investors evangelize the benefits of using ETF’s to grow savings, their profile and share of market will continue to grow. Impressive for a 25 year old upstart!