Saudi Press

Saudi Arabia and the world
Friday, Mar 29, 2024

The first ETF launched 30 years ago, revolutionizing investing

The first ETF launched 30 years ago, revolutionizing investing

Industry is bringing more exotic trading strategies to the masses

Thirty years ago, the launch of the first exchange-traded fund ushered in a new era of investing. Now, the industry is bringing exotic trading strategies to the masses.

The SPDR S&P 500 ETF Trust, which tracks the benchmark U.S. stock index, gave investors the ability to buy and sell hundreds of stocks through a single, publicly traded share for the first time.

The SPDR ETF and the funds that followed popularized the idea of simply following the market, a strategy known as passive investing.


A trader looks at his screen on the floor of the New York Stock Exchange June 29, 2010. Investors fled the U.S. stock market on Tuesday and the S&P 500 tumbled to its lowest level in eight months in a sell-off triggered by a wave of increasin

Today, there are ETFs tracking dozens of asset classes, sectors and investing themes. The funds are favored for their low fees and advantageous tax structure compared with traditional mutual funds. Their popularity continues to grow, even in the midst of a bear market.

Few could have predicted the SPDR fund’s impact when it launched on Jan. 22, 1993.

"At the time, it was not a watershed moment, but it’s now hard to imagine investing without ETFs," said Todd Rosenbluth, an industry veteran and head of research at VettaFi. "A whole generation of investors only thinks about using ETFs to get diversified exposure. They’ve opened up markets that previously were harder to obtain access to."

The industry is quickly expanding to include active management and more exotic investing products like leveraged and inverse funds. Proponents say the suite of cheap investing options has helped democratize investing. Others, noting the fast growth of risky ETFs that use leverage to amplify both returns and losses, are sounding the alarm about the potential fallout for inexperienced investors.

For years, ETFs have gained ground on mutual funds, the traditional broad-based investment option still favored by 401(k) retirement plans. That trend accelerated in 2022. U.S. ETFs took in almost $600 billion on a net basis in 2022, second only to 2021’s record inflow, according to data from Morningstar Direct. Investors pulled nearly $1 trillion from mutual funds. That marked the largest gap in flows between the funds on record.
Michael Sapir, CEO of ProShares, rings the opening bell celebrating ProShares Bitcoin Strategy ETF trading as BITO on the NYSE Arca, at the New York Stock Exchange (NYSE) in New York City, October 19, 2021. REUTERS/Brendan McDermid


To be sure, ETFs aren’t on track to overtake mutual funds soon. ETFs had $6.5 trillion in assets at the end of 2022, versus $16.3 trillion for mutual funds. The SPDR ETF, best known by its ticker symbol SPY, remains the largest ETF, a behemoth with roughly $370 billion in assets.

Most ETFs are similar to index-tracking mutual funds, with several key advantages. ETFs can be bought and sold throughout the trading day, unlike mutual funds, which price once daily at market close.


Perhaps most important, their fees are significantly lower. The average expense ratio for index equity ETFs was 0.16% in 2021, or $16 annually per $10,000 of investment funds, compared with 0.47% for equity mutual funds, according to the Investment Company Institute.

Last year’s market selloff likely provided a reminder for investors to reassess their portfolios, leading to further adoption of ETFs, said Matthew Bartolini, head of SPDR research at State Street Global Advisors, the asset manager behind SPY.

"When you have underperforming active managers with a high fee, and you’re getting hit with a capital-gains tax, that’s going to lead people to leave," Mr. Bartolini said.

The downturn gave savvy investors an opportunity for tax-loss harvesting—selling funds to realize a loss and writing it off for tax purposes. A popular tax-loss harvesting strategy is to sell a mutual fund and quickly purchase an ETF with similar holdings. That practice, known as a wrapper swap, allows investors to realize a loss for tax purposes while staying invested.

Also driving growth in ETFs is the emergence of active strategies and other new products. Passive strategies still made up 95% of the ETF market in 2022, according to Morningstar. But of the 431 new ETFs launched, more than half were active strategies, according to Mr. Rosenbluth. Active funds took in 15% of total ETF flows last year, nearing $100 billion, a record for active strategies.

Popular active ETFs include Cathie Wood‘s ARK Innovation, an active fund that invests in "disruptive" companies, primarily unprofitable firms in the tech sector. Shares of the fund, a favorite among individual investors that soared during the pandemic, plunged 67% in 2022.

Trader Gregory Rowe, center, and others work on the floor of the New York Stock Exchange Monday, March 16, 2020.


Yet despite the poor performance, investors continued to pour funds into ARK. Individual investors showed similar interest in other speculative ETF offerings, including leveraged funds, raising concern over whether the industry is making it too easy for individuals to make risky bets.

For example, the Direxion Daily TSLA Bear 1x Shares ETF, launched in August, aims to provide the exact inverse performance of Tesla Inc. shares. The ETF is the first based around a single stock, according to Mr. Bartolini of State Street. It is the latest example of ETFs allowing widespread access to the kind of trade that once was reserved for institutional or high-net-worth investors with access to Wall Street dealers.

"I hope for the sake of the investors who are using leveraged funds, they really have done their homework and understand the risks that are inherent with these products," said Elisabeth Kashner, director of global funds research at FactSet.

Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
Reports in Gaza: 5 dead from the impact of aid packages dropped by the USA
Apple warns against drying iPhones with rice
China Criticizes US for Vetoing UN Ceasefire Resolution in Gaza
In a recent High Court hearing, the U.S. argued that Julian Assange endangered lives by releasing classified information.
The U.S. vetoed a U.N. Security Council resolution calling for a temporary ceasefire in Gaza, instead proposing its own six-week ceasefire plan contingent upon the release of all hostages held by Hamas
Prince William Urges End to Gaza Conflict
Saudi Arabia ranks first in UN index for e-government services in MENA
Israel has gone ‘beyond self-defence’ in Gaza, says Labour’s Streeting
EU Calls for Immediate Ceasefire in Gaza Conflict
Israel Records 20% Drop In GDP, War In Gaza Is The Reason
Saudi Arabia's FDI Inflows Grow with New International Standards
Venture Capitals Power Up Across MENA Region
Saudi Arabia Introduces Terms for 30-Year Income Tax Exemption for Multinational Companies
Saudi FM: Establishing Palestinian state is only pathway for Mideast stability
Russian opposition leader Alexey Navalny has died at the Arctic prison colony
Elon Musk's Starlink Gets License For Israel, Parts Of Gaza
Influencers Exploit X Platform for Profit Amidst Israel-Gaza Conflict
PM Modi Announces Opening Of New CBSE Office In Dubai
International Criminal Court's Chief "Deeply Concerned" By Rafah Bombing
January Funding for MENA Startups Totals $86.5 Million
Saudi Arabia accelerates digital economy growth through Nvidia partnership
Indian female military officers commend Saudi Arabia's progress and women's empowerment
Israel unveils tunnels underneath Gaza City headquarters of UN agency for Palestinian refugees
Israel deploys new military AI in Gaza war
Egypt threatens to suspend key peace treaty if Israel pushes into Gaza border town, officials say
Israel Utilizes AI Military Technology in Gaza Conflict
Saudi Arabia Warns Of A "Humanitarian Catastrophe" If Israel Moves On Rafah
China Warns Iran to Halt Houthi Attacks or Damage Trade Ties
US University To Shut Qatar Campus Due To "Heightened Mideast Instability"
Iran-backed hackers interrupt UAE TV streaming services with deepfake news
Facebook and Instagram Ban Iran's Supreme Leader
Finnish Airline, Finnair, is voluntarily weighing passengers to better estimate flight cargo weight
U.S. Secretary of State Blinken: The Israelis underwent dehumanization on 7.10, this does not give them the right to do this to others.
Defense Technology Showcase Held in Riyadh
Saudi Arabia’s non-oil exports rise 2.5% to $6bn in November 2023: GASTAT
UK Bans Misleading "Zero Emissions" Claims for Electric Cars
Gaza's Teen Inventor Sparks Light in Displacement
Netanyahu Rejects Ceasefire Proposal, Insists On Total Victory Over Hamas
Guterres appoints independent UNRWA review panel
Private Sector Employment Hits Record High with Over 11 Million Employees in January
Rolls-Royce Executive Encourages Saudi Women to Tap into Their Inner 'Superhero' for Success in Defense Industry
Saudi Arabia launches National Academy of Vehicles and Cars
Saudi Tourism Minister Reveals Plan for 250,000 New Hotel Rooms by 2030
SAR to more than double eastern network passenger capacity with new trains deal
Saudi Arabia Enhances National Defense with New Partnerships
Saudi Aramco Maintains Arab Light Crude Pricing to Asia for March
NEOM Establishes New York Office to Support Investors
Saudi Wealth Fund Draws in Over $25 Billion Worth of Investments in Three Years, Al-Rumayyan Reveals
ZATCA Cautions Against Scammer Schemes
INTRA Defense Technologies inaugurates drone factory in Riyadh
×