After three decades, the legendary SPY ETF remains by far the largest ETF in the world, yet one of its main use cases is precisely why Vanguard founder Jack Bogle chose to forgo the chance to launch the product before State Street took up the mantle.
In hisLittle Book of Common Sense Investing, Bogle said the inventor of the first ETF in the US, Nathan Most, first approached him about listing the product, but Bogle turned down the opportunity and allowed State Street Global Advisors (SSGA) to have its pioneer moment.
"The late Nathan Most, a fine man, initially offered to partner with Vanguard, using our S&P 500 Index fund as the trading vehicle,” Bogle said. “Since I see trading as a loser's game for investors and a winner's game for brokers, I declined his offer. But we parted friends."
Bogle made no secret of his distaste for trading over buy-and-hold investing, with ETFs’ intraday liquidity making them an ideal vehicle for either.
"During the past decade, the principles of the traditional index fund have been challenged by a sort of wolf in sheep's clothing, the exchange-traded fund," Bogle wrote.
"But let me be clear. There is nothing wrong with investing in those indexed ETFs that track the broad stock market, just so long as you don't trade them.”
The godfather of index funds might feel somewhat vindicated that 30 years on from his fateful decision, the SPDR S&P 500 ETF Trust (SPY) houses a colossal $379bn assets but its trading volume is even more remarkable.
Last year the ETF flirted with 100m daily traded units in November and averaged $39bn daily volume through 2022. Assuming there are roughly 250 trading days in a year, this would mean $9.75trn passed through the ETF, making it the most-traded equity security with three times the volume of Apple stock.
Questions are often asked of SPY’s 0.945% fee, which is doomed to be more than three times those of fast-approaching products IVV and VOO from BlackRock and Vanguard, due to the legacy ETF’s unit trust structure.
The low-cost advantage of its rival ETFs may see them overtake as the vehicles of choice for long-term investors, however, SPY remains unchallenged in trading and liquidity, with far tighter spreads and thousands of other products relying on derivatives tracking the ETF.
Article 9 exodus
As many predicted, level two of the Sustainable Finance Disclosure Regulation (SFDR) was the catalyst for ETF assets pouring out of the ‘dark green’ Article 9 classification, with Paris-aligned benchmark (PAB) and climate transition benchmark (CTB) products most affected.
In fact, 73% of assets in ETFs previously classified Article 9 have now been downgraded to Article 8, according to Bloomberg Intelligence data, with roughly $57bn across more than 70 ETFs.
Following the rush for the exit, ETFs and index funds now make up just 5.1% of Article 9 assets in Europe, down 80% from 24.1% during the final quarter of last year.
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