Thirty years ago this month, the first exchange-traded fund listed in the U.S. became available to the masses, a disruptive force that would go on to spawn a new market.
The SPDR S&P 500 ETF Trust, which trades under the ticker SPY, started Jan. 22, 1993. An entire industry exploded around it.
“SPY ended up causing a revolution,” said DataTrek Research co-founder Nicholas Colas, in an emailed note Tuesday. He recalled “SPY’s launch 30 years ago, because it seemed like an answer to a question no one was asking.”
“Active management ruled the roost, thanks to the 1980s bull market, and its reign seemed set to continue in the 1990s,” Colas wrote. “Index mutual funds filled the needs of investors who wanted that strategy. Why did the world need tick-by-tick liquidity and prices?”
SPY now has around $365 billion of assets under management, according to FactSet data.
The ETF “ended up developing its own market over time,” with hedge funds starting to use it as either a hedge or day-trading tool to make long-short bets, while “retail investors glommed onto the product during the late 1990s.”
SPY, a passive fund that tracks the S&P 500 index, also became a cheaper alternative to “high-fee” mutual funds as active managers “continued to underperform through and after the financial crisis,” according to DataTrek.
“Our own take on what made SPY truly special was that it closely followed Clayton Christensen’s paradigm of ‘disruptive innovation,’” said Colas. That meant developing “a new product based on novel technology to address the needs of an underserved or poorly developed market.”
“Steve Jobs did this with the original Apple Macintosh,” he wrote, saying “educational institutions were an early prime target market for this user-friendly computer.” In another example of disruptive innovation, Colas cited Amazon starting as a “bookseller, honing its recommendation engine on data from like-minded readers to deliver its ‘you might like’ selling nudges.”
Apple would move into “music players, smartphones, tablets, watches and services,” he said, while Amazon now “sells everything.”
SPY’s launch, which took almost 3 years to get regulatory approval, has led to more than 3,000 ETFs after three decades, according to DataTrek.
“SPY ended up developing its own market over time,” said Colas. “The ETF structure is now everywhere.”
Many investors have been migrating out of mutual funds into ETFs.
“Consider that the most famous actively managed product of the last 3 years” is Cathie Wood’s “ARKK,” wrote Colas. It’s “an ETF rather than a mutual fund, as it would no doubt have been 10-20 years ago.” Wood’s ARK Innovation ETF, which trades under the ticker was launched in 2014, according to FactSet.
The ARK Innovation ETF has soared 21.9% this year through Monday, after tanking 67% in 2022, FactSet data show. That compares with SPY’s 4.8% gain so far in 2023 and a slide last year of 19.5%.