On This Anniversary of the ETF, a New Frontier Beckons

Jan 29, 2024
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The USA's first exchange-traded fund (ETF) debuted 31 years ago today: Jan. 29, 1993.

That initial fund — a joint venture of the American Stock Exchange and State Street Bank and Trust Co. — tracked the S&P 500 index and carried the name "Standard & Poor's Depositary Receipt (SPDR) Trust, Series 1." Today, most people know it as SPY, which remains the largest (now $480 billion) and most-traded ETF in the world.

ETFs "revolutionized the way investors approached trading securities and indices," the European website Quantified Strategies notes.

Before then, investors had limited options when it came to investing in an entire market or sector. They could either buy individual stocks or [traditional] mutual funds, which often had high fees and were subject to capital gains taxes. With the creation of the first ETF, investors suddenly had a new investment option that allowed them to buy shares in an entire market or sector with just one trade....

By buying shares of an ETF that tracks a particular index, investors [could] gain exposure to all of the companies within that index without having to purchase individual stocks, making it a convenient fund for trading.

According to State Street Global Advisors, manager of SPY, the creation of ETFs "democratized investing — opening the door to markets that were inaccessible to the majority of investors prior to 1993."

As exchange-traded funds began to gain traction with investors, investment companies responded by designing ETFs to track almost any index available. They even created new indexes solely to offer related ETFs! The flood of ETFs made it possible to invest in many less-prominent market niches that couldn't be invested in with traditional index funds.

In addition to making ETFs for stocks and bonds, investment companies also rolled out ETFs that tracked commodities and currencies. And for investors willing to take on higher levels of risk, there were "inverse" and "leveraged" ETFs.

Today, more than three decades after the first ETF, the U.S. has 307 ETF providers offering more than 3,000 funds. At the end of 2023, those ETFs held a combined total of $8+ trillion in assets. More than 10,000 ETFs are available worldwide, with combined assets of more than $11.6 trillion, according to research firm ETFGI.

Exchange-traded crypto

About three weeks ago, a new chapter opened in the ETF story: "ETFs Meet Cryptocurrency."

Although the U.S. Securities and Exchange Commission had greenlighted "bitcoin futures" ETFs in 2021, the SEC held off on "spot bitcoin" ETFs, which expose investors to bitcoin's actual price moves. But now the regulatory roadblock is gone.

On Jan. 10, the SEC approved 11 spot Bitcoin funds (PDF), including from fund giants Fidelity and Blackrock (iShares). As the New York Times put it, the SEC's action "[threw] open the gates to any investors with a traditional brokerage account who can now buy the shares as if they were buying stock in Apple or Google."

Of course, investing in cryptocurrency, even via an ETF, still carries substantial risk. So, some investment companies are taking a hands-off (or at least a "let's be very careful") approach. More from the Times.

Vanguard has no plans to introduce its own Bitcoin E.T.F., and other firms'...Bitcoin products won’t be available for purchase on its brokerage platform, either. "These products are not aligned with our longstanding focus on offering core building blocks for long-term investment portfolios to help clients meet goals such as retirement or saving for college," Vanguard said in a statement. "Unlike equities and bonds, they generally lack intrinsic economic value and do not generate cash flows like dividends and interest payments."

Merrill, part of Bank of America, is making them available only to people with $10 million in investable assets.

Others are offering the products, but with some restrictions: Schwab and E-Trade, for example, said the Bitcoin E.T.F.s could not be sold short or sold on margin, which involves borrowing money from the brokerage to trade (and can increase gains but amplify losses).

Are spot bitcoin ETFs for you?

That's the $64,000 (or 1.6054527194801245 BTC) question.

The answer is, "Perhaps." Much depends on your risk sensibility, age, overall financial situation, and investment purpose (as Vanguard says, spot bitcoin ETFs may not be suitable for goals such as retirement or college).

It still may be some time before spot bitcoin ETFs become part of the SMI universe of recommended funds, but there is no denying that something has substantially changed here. Crypto — like other once-"alternative" investments — is becoming more mainstream.

In a June 2022 article, Mark noted: "Until the firms, protocols, regulations, and so on are beefed up and ready for prime time, [investing in crypto] still playing with fire." We can't say that "prime time" has arrived for crypto, but this regulatory approval is undoubtedly a significant advancement, at least for bitcoin. (Note that Mark has also drawn a sharp distinction between bitcoin and "everything else" in the cryptocurrency world.)

It's a huge step forward to be able to buy BTC via an ETF at your broker vs. having to open and fund a separate account, learn about "hot wallets" and other unfamiliar concepts, and then risk making transactions on the unforgiving blockchain where mistakes are typically irreversible. That said, even with these new ETFs, you can still get badly burned simply by the underlying volatility of BTC. Don't take the risk lightly.

Schwab offers a helpful overview of issues to consider before investing. This Morningstar piece covers some mechanics behind spot bitcoin ETFs (and bitcoin futures ETFs) and explains why BTC ETFs are "less efficient" than other ETFs.

Be careful out there.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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