In a world driven by stochastic hares and deterministic tortoises what have we learnt since the launch of SPY?
As the speed of tech driven change accelerated during those two decades, and each one of us constantly refreshed our RAM, our ability to remember the past seems to have gone by the wayside. Add to that another seven years when the SPDR S&P 500 Trust ETF was first listed on the New York Stock Exchange – can any of us ever truly remember how it was back in the good old days?
Fortunately, we can. At the start of 1993 Whitney Houston topped the charts with “I Will Always Love You” and Bill Clinton ruled the White House, so maybe it wasn’t that long ago after all. But who in their right minds, though, was thinking that an ETF launch would change the investment management industry beyond all recognition? SPY, as it is affectionately known, is the most traded security on the planet, so none of us should be surprised to learn that during the mad month of March, it accounted for a disproportionate amount of the action.
There might be around 10,000 ETF listings on a global basis, but this one ETF personifies the wind of change that has swept through many corners of the capital markets. Representing America’s top 500 companies, SPY acts as an excellent barometer for the health of US capitalism. Hand in hand with the meteoric rise of this single ETF, it has been the reappraisal of what was once considered the orthodoxy of investment management.
Gone are many of those ill-thought out ‘Structured Notes’ that didn’t always do what they said on the tin. Who recalls those crazy CDO Squared products that were not worth the four million pages of the prospectus they were printed on?
Gone is the quaint view that higher investment management fees resulted in better performance. Investors have always been happy to pony up when investment skill is on offer, but in a world driven by stochastic hares and deterministic tortoises, it turned out that investors’ fees would have better been spent on the boring end of the investment spectrum many a times.
Gone is the myth that the ETF eco system was built on sand and will be shown not to be robust when the next financial crisis lands on its doorstep. Sorry, it’s probably time to drop that one after the evidence we garnered from those ill winds of March. It was Shakespeare in Henry VI that first propagated the notion that following an ill wind there might be some winners after all.
I remember that time in 2015 when the Financial Times reported that the market share of ETFs had eclipsed that of hedge funds as total assets under management, AUM, headed towards USD3 trillion USD. Likewise, the success of the ETF as an investment wrapper is personified by the fact that even if one restricts one’s attention to listings on the London Stock Exchange, the top 100 ETFs see their AUM range from between USD2 and USD33 billion USD according to Algo-Chain’s ETF database.
We have all had our epiphany moments during those 27 intervening years, but when I finally got what the benefits of passive investing really offered, for me personally, it cut right across the essence of what I truly had believed in. Like so many others in the early 1990s I turned up on Wall Street with a PhD in a Maths & Science discipline and fell in love with quantitative finance and all that went with it. With that view came a tendency to favour sophistication over the basics. Then taking on the role of being a Discretionary Fund Manager, like so many before me I had to learn the hard way that not all of the best ideas benefit from trying to be too clever. Instead, as it turned out, God had a sense of humour after all. Over the years he, or maybe I should say she, has observed many quants try to prove themselves to be smarter than the next person, and to quote Alexander Pope this process was akin to watching a butterfly be broken on a wheel.
Keep it simple, it turns out that the benefits of diversification appear to be the smartest idea of them all.