In 1990, the world’s first exchange-traded fund (ETF) was launched in Canada, altering the investment landscape and providing the benefits of pooled investing and trading flexibility. In the beginning, ETFs were largely employed by institutional investors to carry out complex trading techniques.
What was the first exchange-traded fund?
The Securities and Exchange Commission (SEC) was used by the American Stock Exchange (Amex) in 1992 “To request the use of the first authorized stand-alone index-based exchange-traded fund, submit a “SuperTrust Order” (ETF). The SEC authorized the petition, paving the path for the S&P Depository Receipts Trust Series 1 to be released “SDPRs” are short for “Standardized Data They immediately acquired market acceptability and went on to become the first commercially successful ETF.
The SPDRs (Ticker: SPY) were the first ETFs to be listed in the United States, debuting on the American Stock Exchange in 1993. The Standard & Poor’s 500 Index serves as the fund’s benchmark. ETFs based on popular benchmarks such as the NASDAQ-100 (Ticker: QQQQ), Dow Jones Industrial Average (Ticker: DIA), and others would come later.
Key Legal Structures
Open-end funds or unit investment trusts are the most common structures for bond and equities ETFs (UITs).
Grantor trusts, exchange-traded notes, and partnerships are the most common types of investment products that track commodities, currencies, or other specialized strategies. Although some of these structures resemble standard ETFs in appearance, they are not always registered or taxed in the same way.
The range of product structures will almost certainly follow the evolution of the ETF universe.
Open-end index fund
The open-end form is used by the majority of ETFs because it provides the most flexibility. Dividends are instantly reinvested and distributed to shareholders on a monthly or quarterly basis in these vehicles. Derivatives, portfolio optimization, and lending securities are all allowed in this ETF design. The Investment Company Act of 1940 governs the registration of open-end funds. iShares, Select Sector SPDRs, PowerShares, Vanguard, and WisdomTree are among the ETF families with this legal structure.
Unit Investment Trust (UITs)
UITs are the most well-known and oldest ETFs, including the BLDRs, Diamonds, SPDRs, and PowerShares QQQ Trust. Dividends are not reinvested in the fund, but are held until they are given to shareholders quarterly or annually in this legal form. The result of these mechanics is a phenomenon known as “dividend drag.” UITs must properly replicate the indices they follow, and they are not permitted to receive income from leased securities. UITs, unlike open-end funds, have expiration periods that can range from a few years to several decades. The majority of expirations are rolled over or extended indefinitely. The Investment Company Act of 1940 governs the registration of UITs.
Grantor Trust
This legal structure delivers dividends to shareholders directly and allows them to keep their voting rights on the trust’s underlying shares. The original securities in a grantor trust are not rebalanced and stay fixed. The Securities Act of 1933 requires grantor trusts to be registered. This is the format used by streetTRACKS Gold Shares, iShares Silver Trust, Merrill Lynch’s HOLDRs, and CurrencyShares.
Exchange-traded Notes (ETNs)
ETNs are debt securities that pay a return that is linked to the performance of a specific stock or index. ETNs are well-suited to specialist asset classes like commodities and developing markets because of their operating structure. Commodity and equities ETNs are taxed as prepaid contracts under existing tax rules. This means that investors only pay taxes when their note is sold, redeemed, or matured. The Securities Act of 1933 governs the registration of ETNs.
The Internal Revenue Service of the United States made an adverse tax judgement on currency linked ETNs in December 2007. The rule declared that any financial instrument connected to a single currency shall be considered as debt for federal tax purposes, regardless of whether it is privately issued, publicly offered, or traded on an exchange. This means that any income earned is taxable to investors, even if it is reinvested and not paid out until the holder sells the financial instrument, such as an ETN, or the contract, whichever comes first. It also means that any gain or loss on a sale or redemption will be treated as ordinary, and investors will not be allowed to choose capital gain treatment. The Internal Revenue Service is scheduled to make a decision on the tax status of ETNs that are tied to commodities and stocks.
Partnerships
Some ETF-like index linked products are really managed as master limited partnerships (MLPs). Even if no cash distributions are given, unit holders must record their portion of the MLP’s income, profits, losses, and deductions on their federal income tax returns.
Who was the first ETF creator?
Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange, were the first ETFs to be introduced in 1989. After a lawsuit by the Chicago Mercantile Exchange was successful in blocking sales in the United States, this product was short-lived.
A similar product, Toronto Index Participation Shares, began trading on the Toronto Stock Exchange (TSE) in 1990, tracking the TSE 35 and eventually the TSE 100 indices. The success of these products prompted the American Stock Exchange to try to come up with something that would comply with the Securities and Exchange Commission’s laws.
Standard & Poor’s Depositary Receipts (NYSE Arca: SPY), which were issued in January 1993, were devised and developed by Nathan Most and Steven Bloom under the guidance of Ivers Riley. The fund, often known as SPDRs or “Spiders,” grew to become the world’s largest ETF. The S&P 400 Midcap SPDRs were introduced by State Street Global Advisors in May 1995. (NYSE Arca: MDY).
World Equity Benchmark Shares (WEBS), which later became iShares MSCI Index Fund Shares, were launched by Barclays in 1996 in collaboration with MSCI and Funds Distributor Inc. WEBS used to track 17 MSCI country indexes managed by Morgan Stanley, the fund’s index provider. WEBS were particularly revolutionary because they provided easy access to foreign markets for inexperienced investors. Unlike SPDRs, which are structured as unit investment trusts, WEBS are structured as mutual funds, making them the first of their kind.
State Street Global Advisors created “Sector Spiders” in 1998, which are individual ETFs for each of the S&P 500 Index’s sectors. The “Dow Diamonds” (NYSE Arca: DIA) were also created in 1998, and they mirror the Dow Jones Industrial Average. The influential “cubes” (Nasdaq: QQQ) were established in 1999 with the intention of replicating the NASDAQ-100’s price movement.
The iShares product line debuted in early 2000. By 2005, it controlled 44 percent of ETF assets under management. In 2009, BlackRock purchased Barclays Global Investors.
The Vanguard Group joined the market in 2001 with the launch of the Vanguard Total Stock Market ETF (NYSE Arca: VTI), which owns every publicly traded stock in the US. Vanguard’s ETFs include share classes of existing mutual funds.
In July 2002, iShares launched the first bond funds: the iShares IBoxx $ Invest Grade Corp Bond Fund (NYSE Arca: LQD), which invests in corporate bonds, and the iShares IBoxx $ Invest Grade Corp Bond Fund (NYSE Arca: LQD), which invests in TIPS. In 2007, iShares launched a high-yield debt ETF and a municipal bond ETF, while State Street Global Advisors and The Vanguard Group also released bond ETFs.
The Euro Currency Trust (NYSE Arca: FXE), which tracked the value of the Euro, was introduced by Rydex (now Invesco) in December 2005. The EONIA Total Return Index ETF, which tracks the Euro, was launched in Frankfurt by Deutsche Bank’s db x-trackers in 2007. The Sterling Money Market ETF (LSE: XGBP) and the US Dollar Money Market ETF (LSE: XUSD) were launched in London in 2008. ETF Securities created the world’s largest FX platform in November 2009, which tracks the MSFXSM Index and covers 18 long or short USD ETC vs. single G10 currencies.
The Securities and Exchange Commission (SEC) approved the introduction of active management ETFs in 2008. On March 25, 2008, Bear Stearns introduced the first actively managed ETF, the Current Yield ETF (NYSE Arca: YYY), which began trading on the New York Stock Exchange.
ETF assets under management in the United States surpassed $2 trillion in December 2014. By November 2019, ETF assets under management in the United States had surpassed $4 trillion. By January 2021, ETF assets under management in the United States had risen to $5.5 trillion.
When did ETFs first become popular?
A Dutch trader is credited with inventing the mutual fund structure in 1774, following a liquidity crisis in Amsterdam in 1772-3. The goal was to allow investors with lesser sums of money to combine their assets and, as a result, enhance their access to profitable businesses while reducing their investment risk through diversification. “Eendragt Maakt Magt,” or “Unity Creates Strength,” was the name of the fund, which was spread among 100 various assets across Europe, Central America, and South America. The fund has been around for almost 120 years and still maintains the record for the longest-running investment vehicle of its kind.
Mutual funds did not become a widely used investment structure in the United States until the late 1920s, despite the early success of “Eendragt Maakt Magt.” Prior to the 1920s, investors in the United States relied on investment trusts or closed-end fund structures for diversification. These arrangements, on the other hand, limited the formation and redemption of shares, making them less sensitive to investor demand to sell their holdings or invest additional money. As a result, closed-end fund shares typically trade at a premium or discount to their underlying net asset value (NAV).
The Massachusetts Investment Trust (MIT) was established in 1924 with an open-end structure that allowed for regular share formation and redemption. Because of the capacity to create and redeem shares on a regular basis, open-end funds could be bought and sold at NAV. This feature was generally overlooked when it was first introduced. Closed-end funds, on the other hand, began to trade at steep discounts to NAV when the Great Depression hit, and investors lost a lot of money. Investors in open-end funds, on the other hand, were allowed to buy and sell at NAV during the Great Depression. As a result, open-end fund structures grew in favor while closed-end fund structures faded away. As a result, open-end mutual funds have spread to practically every corner of the globe.
Both mutual funds and the open end structure were created in response to financial crises. Similarly, the exchange-traded fund structure can be traced back to the 1987 stock market meltdown. Without getting into too much detail, the dynamics of this market crash taught institutional investors that they needed to trade big volumes of stock quickly, especially on an intraday basis. In 1990, the Los Angeles-based investment firm Leland, O’Brien and Rubinstein (LOR) proposed and implemented the idea that equities may be combined together into a basket, listed on an exchange, and traded as a single unit. They essentially intended to list a fund on a stock exchange. While LOR was successful in establishing this fund, dubbed SuperTrust, it failed within a few years due to a lack of interest, which was attributed in part to the fund’s high minimum investment requirements.
The idea of putting a fund on an exchange, on the other hand, was not dead. The Toronto Index Participation Shares, which mirror the Toronto Stock Exchange 35 (TSE 35), debuted on the Toronto Stock Exchange in 1990 and quickly became a popular investment. Following the success of this product, the idea of an exchange-traded fund was reintroduced in the United States. Over the next few years, the concept worked its way through regulatory hoops, culminating in 1993 with what many consider to be the first modern exchange-traded fund in the United States: Standard & Poor’s Depositary Receipts (SPDRs), which track the S&P 500 index. SPDRs, which were issued by State Street Global Advisors, were unique in that they used an arbitrage mechanism (which will be explained later) to keep the fund near to its NAV despite trading on an exchange. However, perhaps more importantly, the SPDRs were inexpensive–nearly anyone could buy them.
As a result, like the other developments previously covered, exchange-traded funds were formed out of a demand for more liquidity. That, however, does not explain why exchange-traded funds have become popular financial instruments. To comprehend this, we must first comprehend what had occurred in the mutual fund business in the years preceding this period.
Individual investors lacked the resources to build highly-diversified portfolios as well as the know-how to manage their money, so mutual funds were developed as a convenience. Mutual fund managers were tasked with not just securing their investments, but also achieving a reasonable rate of return on the pool of assets they had invested. Mutual fund returns, on the other hand, came under closer examination as time went on.
Actively managed mutual funds, according to studies published by Burton Malkiel and others in the 1970s, failed to exceed their benchmark indices on average. In 1975, Jack Bogle founded the first index mutual fund in the United States, in response to a growing body of academic work. “Who wants to be operated on by an average surgeon, advised by an average lawyer, or be an average registered representative, or do anything no better or worse than average?” a huge fund business exclaimed at first, mocking Bogle’s approach.
The facts, on the other hand, did not lie. The majority of actively managed mutual funds (most estimates put this at 2/3) have underperformed their relevant benchmarks over time. As a result, the introduction of index mutual funds altered many investors’ focus from outperforming indices to obtaining the purest version of index performance. The term “passive investment” was used to describe this method. Because of their structural nature, exchange-traded products are highly adept at executing passive strategies, as we will see, and have become considered as alternatives to index mutual funds. As a result, ETPs have multiplied in number and assets in tandem with the expansion of passive investment strategies.
What was the first commodity exchange-traded fund (ETF)?
Central Fund of Canada, a closed-end fund created in 1961, was the first gold exchange-traded asset. It changed its articles of incorporation in 1983 to offer investors a gold and silver bullion ownership product. Since 1966, it has been traded on the Toronto Stock Exchange and since 1986, on the New York Stock Exchange.
Benchmark Asset Management Company Private Ltd in India was the first to propose a gold ETF, filing a proposal with the Securities and Exchange Board of India in May 2002. After problems in securing regulatory permission, in March 2007.
ETF Securities and its principal shareholder, Graham Tuckwell, launched the first gold ETF, Gold Bullion Securities, which debuted on the Australian Securities Exchange on March 28, 2003.
State Street Corporation established SPDR Gold Shares (NYSE: GLD) on November 18, 2004, and within three trading days, the fund had reached $1 billion in assets. It had more than $40 billion in assets and $1.7 billion in daily trading volume as of 2019, making it the world’s largest gold-backed ETF.
The Royal Mint entered the Gold ETF market in March 2020, listing its first financial instrument, “The Royal Mint Physical Gold – RMAU,” which became the first Gold ETF issued by a European sovereign organization. Physical gold bars kept at the Royal Mint location outside Cardiff, Wales, back the fund 100 percent.
What is the age of ETFs?
- Individual investors were initially given access to passive, indexed funds through exchange traded funds, or ETFs, in the 1990s.
- The ETF market has grown tremendously since its creation, and it is currently used by all types of investors and traders all over the world.
- ETFs currently cover a wide range of topics, from broad market indices to specialist industries and alternative asset classes.
When was the S&P 500 established?
Standard & Poor’s, which now sponsors a number of other market indices, was founded in 1860 by Henry Varnum Poor as an investing information service. In 1941, the original Poor’s Publishing combined with Standard Statistics (established in 1906 as the Standard Statistics Bureau) to form Standard and Poor’s Corporation, a financial information and analysis provider. The S&P 500 index, formerly known as the Composite Index (and later Standard & Poor’s Composite Index), was first introduced in 1923 on a limited scale. In 1926, it began tracking 90 stocks, and by 1957, it had grown to 500. The S&P 500, unlike the Dow Jones average, uses a weighted average of the stocks that make up the index. As a result, stocks with higher market valuations have a bigger impact on the index overall.
When did the index fund begin?
Despite the fact that the fund never attracted much institutional money (“I wouldn’t even purchase it for my mother-in-law,” one institutional investor commented), it was the start of a revolution. John Bogle established the first index fund offered to ordinary investors in 1976.
What is the total number of ETFs?
This is a list of significant exchange-traded funds (ETFs) in the United States. By 2020, there will be over 7600 exchange-traded funds in the world, representing around $7.74 trillion in assets. With $353.4 billion in assets as of April 2021, the SPDR S&P 500 ETF Trust (NYSE Arca: SPY) was the largest ETF. The iShares Core S&P 500 ETF (NYSE Arca: IVV) came in second with roughly $270.0 billion, and the Vanguard Total Stock Market ETF (NYSE Arca: VTI) came in third with $213.1 billion.
Which ETF has the longest history?
– There aren’t any surprises here! With a 20-year track record, the S&P 500 tracker is the most profitable investment. With $121 billion in assets under management, the S&P 500 ETF Trust is the largest and most successful ETF on the market. This ETF is the most liquid and actively traded, with over a tenth of all assets invested in ETFs being held in it. This fund demonstrates that success generates fewer expenses with an annual expense ratio of.095 percent.