ETF Investing

The world's largest ETF wasn't the first.
By John Gabriel | 02-01-13

Happy birthday wishes are in order for Standard & Poor's Depositary Receipts (SPDR), which launched on the American Stock Exchange (AMEX) on January 29, 1993. Today known as the SPDR S&P 500 ETF SPY and marketed by State Street Global Advisors, this industry pioneer has just celebrated its 20th anniversary and remains the largest and most heavily traded exchange-traded fund in the world. And based on the media hoopla surrounding the milestone south of the border, you'd think SPY invented the very concept of exchange-traded funds.

About the Author
John Gabriel is an ETF strategist with Morningstar, responsible for Canadian ETF research. He welcomes your comments and queries at john.gabriel@morningstar.com but cannot provide individual advice. Join the discussion and follow John on Twitter: @MstarJohnG.

In an official press release commemorating the fund's anniversary, State Street often refers to SPY as the "first ETF." The firm even has a dedicated microsite with that label. A closer look at the press release, however, highlights a key point. Under the subheading, "Key Facts on the SPDR S&P 500 ETF," the first bullet point calls SPY the "first U.S.-listed ETF."

Thanks in large part to a relatively more amenable regulatory environment, the first exchange-traded product in the world was actually listed right here in Canada. To far less fanfare, the Toronto Stock Exchange celebrated the 20th anniversary of its first ETF listing back in 2010. The TSX created this first-generation ETF to track its TSE 35 Composite Index. The product was dubbed TIPS 35, with the "TIPS" standing for Toronto Index Participation Units. The TIPS 35 began trading in March 1990. While SPY is still around today in its original form, the TIPS 35 have undergone some transformation and today trade as the iShares S&P/TSX 60 Index Fund XIU .

Like SPY, XIU is the dominant ETF in its home market. XIU has $12 billion in assets under management, representing more than 20% of total assets in the Canadian ETF market. It is also by far the most heavily traded ETF on the TSX, with an expansive investor base that includes institutional and retail investors alike. While only a shadow of SPY's US$123 billion in assets (which amounts to about 9% of total U.S. ETF assets), it is all relative. Considering the size of their addressable markets, the two pioneers have pretty similar footprints in their home markets.

As the story goes, ETFs were born out of the stock market crash on Oct. 19, 1987, which saw the Dow Jones Industrial Average plunge 22% in a single day. ETFs were the solution for institutional investors seeking a substitute for trading index futures. In the recently released paper titled SPY: The Idea That Spawned An Industry, State Street provides a detailed history of SPY and suggests that the idea of SPY first occurred as early as 1988. Long-story short, it took SPY about three years to clear regulatory hurdles in the U.S., and by that time TIPS 35 was a toddler.

Regardless of who came first, more than two decades later it is clear that the ETF has been a disruptive technology that has benefited many investors. And as far as the industry has come in democratizing the investing landscape by providing transparent, low-cost, liquid, tax-efficient and diversified investment exposure, the industry is still in the early innings of global adoption and growth.

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