SPY – The Birth of ETFs and a Whole New Way of Trading

This article was originally published on ETFTrends.com.

We are quickly coming up to the 25th anniversary of the first U.S.-listed exchange traded fund that changed the investment landscape as we know it.

The SPDR S&P 500 ETF (NYSEARCA: SPY), which tracks the benchmark S&P 500 Index, was the first ETF to come to market in the U.S. back in January 22, 1993.

"It was a lot of work," James Ross, Chairman of Global SPDR Business for State Street Global Advisors, said at the Inside ETFs 2018 conference. "There was a lot of hard work, technology, all that stuff that no one thinks about - to see whether or not creation/redemption, any kind of process could actually work."

Ross explained how the American Stock Exchange came up with the idea and needed a partner to execute it.

"It was born out of a crisis, was born out of the past in 1987," Ross said, referring to the Black Monday event on October 19, 1987 when stock markets around the world crashed.

The Securities and Exchange Commission indulged in the new SPY ETF idea because they argued that people didn't have anything to hedge with. Instead, investors use to be betting on individual securities and company stocks.

The ETF investment vehicle brought about a new, innovative tool to the financial industry. Unlike traditional open-end mutual funds, what SPY represented was a diversified index-based fund that may be traded throughout normal trading hours on a exchange, similar to a company stock.

To achieve its innovative characteristic, ETFs have to undergo a new creation and redemption process to help the ETF's price mirror the net asset value of its underlying component holdings.

After its launch back in 1993, SPY did not immediately garner the huge success we would associate with it now. The S&P 500 ETF attracted $460 million in its first year, and and it continued to steadily attract more and more attention.

"It was a vehicle which we thought had some flexibility to it," Ross said. "The one thing i always liked about ETFs - and I still do - everyone's patient in price, so it is a very democratic product, compared to other vehicles out there," Ross said.

For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.

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