While exchange-traded funds still seem like the new kid on the block, it's been 20 years since the inception of the first United States ETF, SPDR S&P 500 (SPY). At the time, few imagined this fund would change the way people invest. Today, a slew of ETFs are used by individuals, advisors, and institutions for purposes as varied as long-term, buy-and-hold investing to very short-term speculation in exotic asset classes. There are now over 1,440 U.S. ETFs, and their assets account for about 13% of mutual fund and ETF assets. But through it all, SPY remains the most popular and heavily traded ETF.
Never Let a Good Crisis Go to Waste
According to The ETF Book by Richard Ferri, the inspiration for the first ETF was partly born from the wreckage of Black Monday. On Monday Oct. 19, 1987, the Dow Jones Industrial Average fell over 22%. Program trading, in which institutional investors trade large blocks of stocks and futures simultaneously, received some of the blame for the crash. In response, regulators and exchanges established rules that would trigger certain trading restrictions during market downdrafts. These rules were designed to prevent future panics and promote market stability. However, these trading curbs had the effect of limiting the use of futures and program trading just when institutions needed liquidity. This created demand for a liquid product to serve as an alternative to index futures and which would allow investors to implement basket transactions via a single instrument on the stock exchange.
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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.