What a Difference a Quarter Century Makes

February 2018

It has officially been over twenty-five years since SPY (SPDR S&P 500 ETF) – the very first exchange traded fund — began trading. In some ways, it's hard to believe it has been that long since ETFs were created. In other ways, when you consider how much the investing landscape has changed, it feels like ancient history.

I remember 1993 well. The US economy was in growth mode, fueled by the Internet boom, low interest rates, low energy prices, and a resurgent housing market. For investors, it was the age of the star manager, the hot stock, and actively managed mutual funds. It’s no surprise, really, that the ETF existed in relative obscurity for nearly a decade.

When the markets went through the dot-com bust and double-digit losses, investors came out the other side more cost-conscious and risk-averse. It was then that they started gravitating to the lower costs and higher efficiency of ETFs.

Consider this — it took SPY three years to get to $1 billion in assets. Today the fund is approaching $300 billion. Since SPY launched, more than 2,000 ETFs have followed, including over 275 last year alone1. Millions of investors have embraced the ETF as a vehicle of choice to get exposure to the markets.

It's worth noting that while the growth of ETFs took off in the early 2000s, it has really accelerated in the last five years. In June 2013 ETFs held $1.34 trillion in assets2. Today that number is over $4 trillion, and ETFs have overtaken hedge funds as measured by assets under management.3

While the innovation and growth in ETFs has been significant, it has also spurred additional innovation that has proven transformative for investors.

The low cost structure of ETFs often make them suitable for packaging into solutions based-products that can be easily delivered to clients in the form of robo-advice offers, multi-asset funds, and other "all-in-one" products.

These solutions are serving an important need for self-directed investors who are looking for help in constructing portfolios because they lack the time, desire or expertise to do it themselves.

It leaves me to wonder what the next 25 years might look like. It would not be surprising to see ETFs play a bigger role in delivering portfolio solutions to self-directed clients. Today, these solutions offer some customization for clients. But, as a greater level of sophistication comes to these products through technology and the layering on of financial planning, they will likely be more and more tailored to each client’s needs. And that's a good thing.



Marie Chandoha
President and CEO, Charles Schwab Investment Management

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