The SPDR S&P 500 ETF (SPY), which turns 25 next month, is The Clash of investing: counterculture and revolutionary for its time, now a favorite of those in business suits and corner offices the world over.
This first U.S.-listed—and still the largest at the global level—ETF was almost unlike anything that came before it. Eventually it would come to upend decades of accepted financial wisdom, bending the investment paradigm around it. Thanks to SPY, and the ETF revolution it kick-started, investors stopped thinking of the markets in terms of inefficiencies to exploit, and began dividing it into risks and exposures, with allocations to each. Money management was never the same again.
"SPY transformed the way investors thought about investing," said Jim Ross, executive vice president of State Street Global Advisors and chairman of the Global SPDR Business. "I can't say that was even a twinkle in our eye 25 years ago."
Although SPY was never intended to be more than a trading tool for institutions, it quickly became a must-have fund for all market participants, from hedge funds to mom-and-pops. And though SPY has ceded market share in recent years to its lower-cost competitors, its unrivaled liquidity and name recognition prove there's plenty of life left in this Casbah to rock.
Fixing A Stock Market Crash
With over $250 billion in assets, SPY is by far the largest U.S. ETF; it's nearly double the size of the next-largest fund, the iShares S&P 500 ETF (IVV). But when SPY first launched, nobody—not even its originators—expected it to become the juggernaut it is today.
"The folks working on SPY thought there might be three or four ETFs in the U.S.," in total, says Ross.
SPY was the brainchild of Nate Most and Steven Bloom, the two-person product development team at the American Stock Exchange who, in the 1980s, were tasked with reverse-engineering a product that could have withstood the 1987 Black Monday stock market crash.
They devised a concept based on "warehouse receipts"—documents that show proof of ownership over a quantity of stored commodities. To shift ownership, commodity traders would exchange these receipts instead of moving product from warehouse to warehouse.
Most and Bloom wondered if something similar might work for equity markets: Stocks could be "warehoused" in a unit investment trust (UIT), shares of which investors could trade as much as they liked, without impacting the underlying stocks or incurring trading costs for fellow investors.
"It would offer all the instant access of futures, but backed by something physical," said Eric Balchunas, senior ETF analyst for Bloomberg Intelligence.
Though individual elements of the concept weren't new, the idea of an index-based UIT trading intraday on an exchange was. Most and Bloom's idea took over five years to get off the ground, and several banks and fund companies passed on it, including Wells Fargo Nikko, which eventually became Barclays Global Investors and then iShares.
Then, in 1990, AMEX approached State Street, which agreed to serve as trustee to the new UIT. Its backing of the product gave SPY the credibility it needed to be taken seriously by large institutions, the primary intended user.
SPY Launches, And Stumbles
On Jan. 22, 1993, SPY received its initial seeding: $6.53 million—a paltry sum today—and began trading a week later. It debuted with a splash: On its first day, SPY traded just over 1 million shares.
The fund grew quickly. By the end of the summer, the fund had $270 million in assets, with daily volume of at least 100,000 shares. Volume, and assets, climbed higher every day.
It wasn't all smooth sailing for SPY, however. In 1994, a year after SPY launched, the ETF saw net outflows instead of inflows, a troubling sign for a brand-new investment product. But those flows quickly reversed in 1995, and SPY hit its first $1 billion in assets that year. It then doubled in size almost every year until the dot-com crash. The "SPDR," or “spider” as it was called, had found its legs.
Source: Bloomberg; data as of Dec. 4, 2017