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A Better Mousetrap For Indexing

Written by Cinthia Murphy

 –  January 24, 2013

 

The SPDR S&P 500 ETF (NYSEArca: SPY), the world’s largest exchange-traded fund, is 20 years old this year. James Ross, global head of ETFs at State Street Global Advisors, tells IndexUniverse.com correspondent Cinthia Murphy that it’s still a surprise that SPY has become a $125 billion fund.

This interview originally appeared on our sister site, IndexUniverse.com

IU.com: SPY is turning 20. Where were you when the first-ever ETF came to be, and what role did you play in its creation?

Ross: I joined State Street in July 1992, and got involved with SPY shortly thereafter. But I have to say there were a lot of folks involved with it, including the folks from the asset-servicing side, trying to figure out how to make creation/redemption—and things that we look at today as being straightforward—work. Making them work for the first time was anything but straightforward!

IU.com: What inspired the idea to come out with a product like SPY? And on that, what were some of the other products that evolved from Nate Most’s original concept?

Ross: The original concept was based on what they called “warehouse receipts,” and the question was whether there was a way to take those and have them list and trade on an exchange as well as be asset-backed. That was a key consideration. In other words, the concept really was to have something that was asset-backed that was able to trade at fair value, or as close to fair value as possible in multiple market conditions. In positive conditions and in times of stress, no matter the market environment, we wanted to make sure the underlying information was known at all times, and that people could make markets of it.

IU.com: Was that a hard initial sell? How did you first introduce an ETF to investors?

Ross: Well, it took a lot of education. But the concept was based around indices, and for SPY, giving people broad access to the S&P 500. It made sense. Index investing wasn’t a totally new concept at the time.

IU.com: And from SPY to 1,400-plus ETFs in a short 20 years.

Ross: I can tell you that Nate’s view initially wasn’t that there would be thousands of ETFs. That’s for sure. His original vision was that there was a potential for having maybe five ETFs in the market.

IU.com: From the get-go, what was the expectation in terms of asset gathering? Did you ever envision it as a $120-billion-plus fund?

Ross: I’m not so sure. There were concerns about whether SPY would trade and people would invest in it. We all put a significant amount of energy into getting it launched. There were some questions as to whether this was going to have any longevity and be successful.

The original prospectus language noted that if the product didn’t reach a certain size, it would be shut down and all sorts of things—language that looks almost silly in a product nearing $130 billion in assets, and one that was the main asset-gathering ETF last year and continues to grow. But we had no idea it would get to where it is today.

IU.com: Was there a turning point when you knew SPY would stick around for good?

Ross: There was probably a point in 1995 or 1996 when we started to see more traction and more trading, and we started to be more comfortable that this product would stay. Once it got traction, it hit a point for a number of years in the late 1990s when it just doubled in size every year. It had a number of years when assets were growing at 100 percent. That’s obviously not sustainable, as you get bigger, but it’s still impressive.



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