25 years ago, ETFs were born. since then, they have increasingly become part of the modern financial portfolio as transparent, inexpensive and flexible investment products. The chronicle of a victory.
A real accolade for exchange traded funds (ETFs) was bestowed in March 2012. Investment legend Bill Gross, the Co-CIO and founder of the famous investment management firm, PIMCO, announced to the press the launch of the PIMCO Total Return ETF. With that move, one of the most important active fund managers in the world launched a passive investment vehicle – exchange-listed and liquid on a daily basis, instead of tradable only once per day. Market observers compared his decision to replicate his flag-ship fund as an ETF as if the Devil himself had decided to sell holy water. Many doubted the success of the project. Just one year later, and all the doubters have been silenced: PIMCO has collected around USD 4.3bn from investors with its active ETF. This most recent evolution of the ETF landscape has been a huge success.
A REAL INNOVATION
When a small group of exchange brokers and exchange employees in Toronto, Canada developed a new kind of investment fund 23 years ago that went by the name of the Toronto Index Participation Fund, they had no idea what revolutionary effects their new invention would have. The world’s first exchange traded fund was thus born in March 1990. For the first time, investors could participate in the performance of the Canadian Stock Index, the TSE 35 Index, without having to go to the arduous step of purchasing all of the 35 shares in it. From then on, it was possible to have the entire stock index in one’s securities account by purchasing a single fund share.
The exchange traded fund performed just like the index and tracked it like a shadow. In the specialized jargon, this is referred to as a “passive investment.” With it, an investor does not miss out on a market movement in the index because he just did not include one or two shares in his share account, or because he did not otherwise have the means of tracking the index. The composition and in particular the management — in the context of the operational administration — of an ETF are clearly simpler and more economical compared with classical investment funds, because the exclusive goal of the ETF manager is merely to track the performance of a reference index. In that way, with ETFs, the investor pays considerably less fees than he would for classical investment funds, and is always at least as good as the reference index. These innovative characteristics continue to define ETFs, to this day.
A KICK START, THANKS TO WALL STREET GUYS
This novel financial product, the ETF, did not remain undiscovered for long. In January 1993, the idea reached the United States. Financial product developers Nathan Most and Steven Bloom in New York City were inspired by the ETF out of Canada. The two worked for the American Stock Exchange (AMEX) and also developed a fund listed on the exchange with which an investor could track the entire Standard & Poor’s 500 Index with just one fund share. The new index fund was shortened to the four letters “SPDR” – for S&P Depositary Receipts. In the language of the stock exchange, that abbreviation is pronounced “spider.” At first, primarily large-scale asset managers and banks invested millions in “SPDR.”
But soon private investors discovered the advantages of the ETF. The above-mentioned “SPDR” has become the largest ETF in the world since then, and has a market capitalization of more than USD 137bn. ETFs have established themselves in just over ten years as a fixed component of asset management. Whether it is private investors, investment consultants or institutional professional investors – all increasingly use the exchange traded index funds for their individual investment strategies and for their asset allocation. Worldwide, there were 269 ETFs in 2003, in which USD 205bn was invested; ten years later, the assets globally invested in ETFs reached USD 1.92 trillion, a new record. At the end of 2013, investors had roughly 3,700 ETFs to choose from.