First ETF Transformed Investing

"The launch of the first exchange-traded fund 30 years ago ushered in a new era of investing. Now, the industry is bringing exotic trading strategies to the masses.

The SPDR S&P 500 ETF Trust, which tracks the benchmark U.S. stock index, gave investors the ability to buy and sell hundreds of stocks through a single, publicly traded share for the first time.

The SPDR ETF and the funds that followed popularized the idea of simply following the market, a strategy known as passive investing.

Today, there are ETFs tracking dozens of asset classes, sectors and investing themes. The funds are favored for their low fees and advantageous tax structure compared with traditional mutual funds. Their popularity continues to grow, even in the midst of a bear market.

Few could have predicted the SPDR fund's impact when it launched on Jan. 22, 1993.

"At the time, it was not a watershed moment, but it's now hard to imagine investing without ETFs," said Todd Rosenbluth, an industry veteran and head of research at VettaFi. "A whole generation of investors only thinks about using ETFs to get diversified exposure. They've opened up markets that previously were harder to obtain access to."

The industry is quickly expanding to include active management and more exotic investing products like leveraged and inverse funds. Proponents say the cheap investing options have helped democratize investing. Others, noting the fast growth of risky ETFs that use leverage to amplify both returns and losses, are sounding the alarm about the potential fallout for inexperienced investors.

For years, ETFs gained ground on mutual funds, the traditional broad-based investment option favored by 401(k) retirement plans. That trend accelerated in 2022. U.S. ETFs took in almost $600 billion on a net basis in 2022, second only to 2021's record inflow, according to Morningstar Direct data. Investors pulled nearly $1 trillion from mutual funds. That marked the largest gap in flows between the funds on record.

ETFs aren't on track to overtake mutual funds soon. ETFs had $6.5 trillion in assets at the end of 2022, versus $16.3 trillion for mutual funds. The SPDR ETF, best known by its ticker symbol SPY, remains the largest ETF, with roughly $370 billion in assets.

Most ETFs are similar to index-tracking mutual funds, with several key advantages. ETFs can be bought and sold throughout the trading day, unlike mutual funds, which price once daily at market close.

Their fees are significantly lower. The average expense ratio for index equity ETFs was 0.16% in 2021, or $16 annually per $10,000 of investment funds, compared with 0.47% for equity mutual funds, according to the Investment Company Institute.

Last year's market selloff likely provided a reminder for investors to reassess their portfolios, leading to further adoption of ETFs, said Matthew Bartolini, head of SPDR research at State Street Global Advisors, the asset manager behind SPY. "When you have underperforming active managers with a high fee, and you're getting hit with a capital-gains tax, that's going to lead people to leave," he said.

The downturn gave savvy investors an opportunity for tax-loss harvesting -- selling funds to realize a loss and writing it off for tax purposes." [1]

1. First ETF Transformed Investing
Pitcher, Jack.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 23 Jan 2023: B.1.