This article is part of an ongoing series celebrating the 30th anniversary of the first ETF listed on U.S. exchanges.
Read more from our 30th anniversary coverage:
‘SPDR Woman’ Helped Drive ETF Innovation
Vanguard Zeros in on BlackRock’s ETF Crown
30 ETF Milestones Over 30 Years
ETF Industry’s Next 30 Years of Twists and Turns
The SPDR S&P 500 ETF (SPY), the first U.S.-listed exchange-traded fund, turned 30 this week, with more than $370 billion in assets under management. Jim Ross, now the chairman of special purpose acquisition company Fusion Acquisition Corp. II, was involved in the early days of SPY helping to keep the product’s books before it even launched and managing accounting for the new fund once it was trading.
As his role developed further at State Street, he became the public face of SPY, giving presentations about the fund and educating investors and market participants on how ETFs work. After 28 years, he retired from State Street Global Advisors as an executive vice president and the chairman of its ETF business.
ETF.com’s Heather Bell spoke with him about his role and his thoughts on the product he helped run and popularize.
ETF.com: Would you talk about your role in the creation of SPY?
Jim Ross: I joined State Street at the end of July 1992. They had a new group going, a kind of emerging business they were starting, called fund administration. I was hired into that and got out of public accounting, which was probably one of the happiest days of my life.
I didn't have a ton of work, and I was used to working a lot. At one point, I went to my boss and my boss's boss [and said], “I need more work.”
They said more work was coming and to just be patient. I just wasn't used to not working hard. When I came out of public accounting, I was working 60-80 hours a week.
Finally, there was a group of people who were working really hard on something [and] I had no idea what it was. [Finally] I was brought on to the project in late October to early November 1992 because I could do the financial statements that were required for the IPO.
I'm literally the most junior person on this team, and I’m just doing whatever it takes, including doing financial statements until 1:00 in the morning on the UIT. [SPY is structured as a unit investment trust, which has a fixed portfolio, while most ETFs today are structured as open-end funds, meaning those investments can be managed.]
[The structure] has unique rules such that you had to close the books after the close, and then have an audit of it before you open the next day, which, for UITs, is always just funded with cash. That was never difficult to do. For UITs funded with 500 shares of in-kind stock and cash, there's a lot of work to do.
I get a lot of credit for SPY, and I deserve none. [There are] a lot of things I think I should get some credit for, including launching GLD and the first ETFs in Australia and Hong Kong. I wasn’t at the bell ringing for SPY—I was back in Boston. Everyone was celebrating and I was in my office in my cubicle in Quincy, Massachusetts, working overnight.
ETF.com: You were the duck legs under the water that no one sees paddling?
Ross: For years, that was the role I played. I think most folks who know me now don't see me as that. In the early days, my first job was to really understand it, so I became an expert in things like creations and redemptions, the trading side of it and a whole bunch of different things.
ETF.com: Were there any roadblocks on the way?
Ross: This process started in 1989, which is why the Canadian folks say we started it and they got there first. [The world’s first ETF launched in Canada in 1990.] In the first few years, we were dealing with the SEC, and we were trying to figure out what they would allow.
They wanted this product. They asked for the industry to come up with something that would work better than what was called portfolio insurance, because it did not work in 1987 during the crash. They wanted to solve [the problem], but they also wanted it to be something they understood. This was so different, they really struggled with it, was my understanding.
People will ask why it was the way it was, why the UIT [structure], because that doesn't make any sense today. That's what the SEC would allow at the time. The SEC would not allow you to do a direct mutual fund ’40 Act [product] like they allow people to do now.
And they didn't allow that for SPY, MDY, DIA. At some point, Morgan Stanley had [launched] the WEBS (country ETFs), which was a [’40 Act] series trust, and then when we did the Sector SPDRs, we did it as a series of ’40 Act [open-end] funds, not UITs. It took [the SEC] four or five years to get comfortable with that.
ETF.com: What were the SEC’s concerns about a ’40 Act structure?
Ross: Because [UITs are] seen as unmanaged, they liked [them] better. It is a very stringent requirement [regarding] what they are allowed to do to manage that product. And it's not as flexible as if you're in a more traditional fund structure today. There are some pluses and minuses to that. But it's very predictable, and The Street knows it.
ETF.com: Was there any skepticism around SPY when it was being created and launched?
Ross: A lot. My boss's boss put a lot of effort and State Street technology dollars into this. He was literally [saying], “I hope this works.”
One of the things about UITs is you can't just close them if they don't work. If you look at the prospectus for SPY, it says that if we don't have over $350 million in two years, it automatically just shuts down.
I bought some at the end of year one. [It was] literally above where it needed to be, but it was not seen as a smashing success in the early days. But then it did a strange thing—it just started to double: $400 million to $800 million, $800 million to $1.6 billion and $1.6 billion to $3.2 billion. It just kept on doubling for about five years.
We knew we had something that was probably going to stay around for a while.
ETF.com: Did you ever suspect it would be the foundation of what's become basically a $10 trillion global industry?
Ross: Not that [far] back in the early days, 1992. Investment banks and large brokerage firms weren’t exactly cheering on ETFs in the early days. That's back when they were selling stocks on commissions and a product that gets you access to 500 stocks for one commission was not something that was really of interest to them. The Sector SPDRs were really the first venture that was pretty much focused on retail accounts.
Even in the early 2000s, when Barclays Global Investors [the firm that debuted the iShares family] launched and came in with a very good strategy and plan, they were focused on direct retail to start. And they had to pivot to the financial advice world, which they did.
They did well over time, but there was talk in San Francisco in 2002 [about] shutting down iShares. My understanding was the traditional indexing folks didn’t like this new stepchild, and this new stepchild was getting a lot of money and a lot of investment and wasn't breaking even. There was a significant amount of internal strife about whether or not to even keep it going. [The iShares were eventually sold to BlackRock in 2009.]
ETF.com: How has SPY changed investing and the financial industry?
Ross: It was a catalyst to giving investors a lot more choice. We could talk about ETFs giving too much choice today, but that's a different question. I think what it created, and then what the marketplace did with it—and this is where I think it's unique. A lot of the ETF sponsors like to take a lot of credit for the growth of ETFs, but I think about it [as] people using the products.
I go back to AG Edwards creating the first ETF wrap for their financial advisors to use, and I think they were charging 2%. No one cared—it was unique. And then you had a bunch of other factors.
The changing of the whole brokerage world going from commission-based to fee-based was huge. ETFs didn't fit in a commission-based financial advisor world and never would. But in the fee-based world where low cost was important for those online products, that was hugely important.
At the same time, you have the market forces of spreads compressing from competition between the exchanges.
And all of that brought down the cost of getting into ETFs and continues to bring the cost of buying ETFs down and down, which has just allowed for investors of all kinds, institutional, financial advisors, all these folks to come up with unique ways of using them to solve their problems, and frankly, to solve millions of investors’ challenges about how to best invest for their own purposes, whether they're trying to buy a boat or retire with a couple of dollars in their pocket.
I've had some people call it the greatest financial innovation since the money market fund. I was like, “Hmm, that’s interesting. I never thought the money market fund was that innovative.”
I [also] heard it called the greatest financial innovation of the 20th century. I'm not one for putting labels on this. I was happy to be a part of it, to see it through from early stages to [becoming] just a huge growth engine for a lot of different firms. And just to see what it did for investors.
I also think we forget about [the fact] that it created a lot of jobs if you think about the ecosystem. It created etf.com. It might have cost some jobs, but you’ve just got to compete.
Contact Heather Bell at [email protected]