Thirty years ago this week, State Street Global Advisors launched the Standard & Poor’s Depositary Receipt (SPY), the first U.S.-based Exchange Traded Fund (ETF), which tracked the S&P 500. ETFs differ from mutual funds in numerous ways, such as lower annual fees, can be traded intraday, are more tax-efficient, and has no minimum purchase requirements.
However, for a product that would end up changing the investment world, ETFs started off poorly. Vanguard founder Jack Bogle had launched the first index fund, the Vanguard 500 Index Fund, 17 years before, in 1976. The SPDR encountered a similar problem. Wall Street was not in love with a low-cost index fund. “There was tremendous resistance to change,” Bob Tull, who was developing new products for Morgan Stanley at the time and was a key figure in the development of ETFs, told me.
The reason was mutual funds and broker-dealers quickly realized there was little money in the product. “There was a small asset management fee, but the Street hated it because there was no annual shareholder servicing fee,” Tull told me. “The only thing they could charge was a commission. There was also no minimum amount, so they could have got a $5,000 ticket or a $50 ticket.” It was retail investors, who began buying through discount brokers, that helped the product break out.