A Lookback At ETFs From The Trenches

Seventeen years ago, iShares launched its first wave of ETFs, and immediately changed the asset management business. A member of that team recalls how the magnitude of its success took even some insiders by surprise.

This season, I opted (with bit of a prod from upstairs) to extend my end-of-year lookback to the naissance of exchange-traded funds (ETFs). It’s now been 25 years since the venerable SPDR S&P 500 ETF (NYSE Arca: SPY) was launched. When introduced in 1993, SPY was a stand-alone ETF. Most people, in fact, think of SPY as the very first exchange-traded fund. It wasn’t. It was the first truly successful ETF.

Other exchange-traded products preceded SPY, but ultimately fizzled due to regulatory or liquidity issues.

What’s really important, though, is what happened after SPY was launched. The SPDR fund, after an initial stumble, grew assets at a torrid pace, but didn’t spark immediate competition or emulation. Oh, a few ETFs trickled on to the scene, but interest in them was muted compared to the market’s love of SPY.

In 1995, the SPDR S&P Midcap 400 ETF (NYSE Arca: MDY) debuted as a complement to the large-cap-focused SPY fund. World Equity Benchmark Shares were launched in 1996 as a family of single-country foreign stock index trackers, eventually being merged into the iShares product line in 2000.

It took another two years before the next ETF was launched. DIAMONDS (NYSE Arca: DIA), a Dow Jones Industrial Average tracker, came on the scene in 1998, followed by the introduction of Select Sector SPDRs, a 10-fund suite that carved the S&P 500 into industry sectors. The following year saw the entrance of what is now known as the Nasdaq-100 ETF (Nasdaq: QQQ), which enjoyed brisk interest as the tech sector boomed ahead of the “dot bomb.”

Then, in May 2000, came iShares. And that’s where I come in. I helped launch the iShares line of ETFs. At the time, my confrères and I believed the iShares funds were game changers. First of all, the offering was B-I-G. iShares were floated en masse, providing investors, in one stroke, the means to build a broad range of risk-diversified portfolios under one brand. The iShares offer included 66 ETFs: 34 ETFs slicing and dicing the U.S. market by capitalization tiers, investment style and industry sector, alongside 23 funds representing foreign markets. On its debut, the iShares brand accounted for more than 70 percent of the ETFs extant in the United States.