July 30, 2021
October 19, 1987 – a day now known by the darker moniker Black Monday. Share prices plummeted so precipitously that the resulting damage to the stock market would ultimately prove more significant than the Great Depression.1 Almost immediately, regulators began to ask what went wrong.
The US Securities and Exchange Commission later said that automated orders for every stock in an index were at least partly to blame for the crash and concluded that the creation of a market maker to trade a basket of stocks "might alter the dynamics of program trading."2 It was an open invitation to create a new product.
Turning Crisis into Innovation
Fast forward to the winter of 1993, when a group of financial executives rang the opening bell of the American Stock Exchange Please to launch the first Exchange Traded Fund (ETF) in the US —the SPDR® S&P 500® ETF3 — with the ticker symbol SPY. After more than three years of collaboration between State Street (then known as State Street Bank) and the American Stock Exchange, the basket of securities that tracks the performance of the S&P 500 index finally made its debut.
The American Stock Exchange (later acquired by the New York Stock Exchange in 2008) had initially approached the indexing pioneer and custody/clearing giant because of its proven expertise in managing to specific criteria – in this case, State Street’s portfolio management skills and money movement capabilities.
SPY ultimately proved successful. Indeed, one significant early investor in SPY was an Australian pension fund.
By 2001, ETFs had crossed the Pacific and were launched in Australia. On 27 August 2001, StreetTRACKS, now known as State Street Global Advisors SPDR, listed Australia’s first ETFs — the SPDR® S&P®/ASX 200 Fund (STW) and SPDR® S&P®/ASX 50 Fund (SFY) – two flagship equity funds that gave investors clear access to the country’s large-cap shares.
Originally introduced as a tool for institutional investors to invest their cash reserves, ETFs immediately proved popular with retail investors, even though it was still a relatively new product in 2001.
One of the key attractions of investing in ETFs is the “instant diversification” potential. Investors gain exposure to the largest 200 Australian companies in one ETF – all with a single transaction that allows them to spread their risk in a simple and cost-efficient way.
As they are listed on the market, investing in an ETF is as easy as owning a stock. And with a range of products to choose from, investors can target specific asset exposures and access an array of sectors, markets, and countries. These features make ETFs attractive to self-directed investors and Self-Managed Superannuation Funds (SMSF), which has helped drive demand for ETFs in recent years.
Changing the Way We Invest
ETFs allow investors to focus on outcomes with greater efficiency – through targeted exposure, matching portfolio goals with transparent underlying holdings. Today, anyone with a broking account can build an ETF-focused portfolio covering an extensive range of asset classes.
1 “The Crash of '87: Stocks Plummet 508 Amid Panicky Selling,” The Wall Street Journal, October 20, 1987
2 “The October 1987 Market Break”, US Securities and Exchange Commission, February 1988
3 The SPDR® S&P 500® ETF (SPY) is a U.S. domiciled ETF. The Australian domiciled SPDR® S&P 500® ETF Trust (SPY) was first quoted on the AQUA market of the ASX on 13/10/2014 and offers CHESS Depository Interests over interests in the U.S. SPY fund. For more information refer to the Product Disclosure Statement available at www.ssga.com/au.