ETFs Evolve, Yet Again

Almost 30 years have passed since the birth of ETFs and many milestones have been reached along the way. The latest helps to address the long-awaited needs of confidential active management. 

By: Reginald M. Browne, Principal, GTS


On March 9, 2020, the global ETF industry will celebrate its 30th anniversary by recognizing the advent of the very first exchange traded funds — Toronto Index Participation Shares (TIPS) which were listed and traded in Canada on the Toronto Stock Exchange.

Three years later, ETFs were introduced in the US. At the time, many believed that the catalyst behind the introduction of ETFs was to provide broad market intraday liquidity as an institutional solution to addressing the impact behind the contributors of the 1987 stock market correction and to offer market participants a mechanism to achieve broad market exposure.

While the success of ETFs was debated and questioned in the early days, what is without question is that ETFs have played a significant role in reshaping the investment management landscape and more importantly, offering a measurable refinement of the client mindset.

Over the last 29 years, a series of firsts have been celebrated with respect to exchange traded funds, exchange traded product structures, and product delivery.

One would be remiss if not to offer a few highlights of the remarkable innovations that have occurred in the United States ETF industry.

  • The world’s largest and first US ETF, the SPDR S&P 500 (SPY), was launched on January 22, 1993
  • The first series of developed markets international ETFs were launched on March 12, 1996 under the brand WEBS and later rebranded iShares.
  • The first corporate bond ETF, the iBoxx Investment Grade Corporate Bond ETF (LQD), was launched on 7/22/2002
  •  The first commodity ETF, SPDR Gold Shares (GLD), was launched on November 18, 2004
  • The first series of leveraged ETFs came to the market on June 19, 2006 branded Proshares.
  • The first actively managed ETF – issued by Bear Stearns in March 2008 but later delisted as it was ahead of its time.

There are three main drivers behind the dramatic growth that we have seen in the ETF industry:

  • Innovation in asset class representation
  • Engagement and adoption of ETFs by new investor groups
  • New ETF sponsors entering the industry with innovation

The early success of the ETF industry can be measured by the holistic adoption of single factor ETFs replacing various investment vehicles such as futures and open-end funds. If you were around in the early days, education on ETFs was the binding element of the ETF ecosystem.  As the complexity of the products grew, with examples such as corporate bond and emerging markets ETFs, education sharpened, and investor engagement grew.

The resiliency of the ETF structure has been tested in various market conditions and has proven to outshine the toughest critics. With nearly 30 years of empirical data, the simplicity of exchanging an underlying basket for representative ETF shares has led asset managers to bring new ideas and innovation to all investors.

In this new decade, and fittingly on the eve of the 30th anniversary of the ETF industry, the next round of innovation will enter the ETF landscape.

Active managers will launch a series of active ETFs. This will be driven by the advancements made in the development of ETF structures that better accommodate active management.

Mutual Fund managers have long sought to bring active strategies to the next generation of investors and portfolio builders in the ETF structure. Today, Precidian Investments provides active managers the solution, ActiveShares.

ActiveShares will shield the portfolio composition in the new ETF structure while providing investors with a real-time portfolio value. The introduction of an independent third party, an Authorized Participant Representative (APR), will act as a conduit between the ETF and the community of market makers.

One would not confuse me for anything but an ETF protagonist. Objectively, the time is ripe for active asset managers to enter the ETF landscape holistically. I predict the open-end fund structure will transition into the 40 Act ETF structure as the preferred delivery model for both passive and active strategies. Tailwinds energized by client mindset, no transaction fee retail brokerage platforms, and fractional shares friendly policies creates the environment, all ETFs including the ActiveShares brand will benefit.

2020 brings us the next round of ETF innovation championed by Legg Mason and Precidian. Investors will ultimately be the beneficiary as ease of access to the best ideas will continue the tradition of ETFs investors have come to expect from the ETF industry.