How SPY Reinvented Investing: The Story of the First US ETF

• The SPDR® S&P 500® ETF (SPY), a basket of securities tracking the performance of the S&P 500® Index, made its debut in 1993 as the first US-listed ETF.

• More than thirty years later, SPY is the largest,¹ most liquid,² and most heavily traded ETF in the world,³ with an average trading volume of $34 billion each day.⁴

• SPY democratized investing — opening the door to markets that were inaccessible to the majority of investors prior to 1993.

“Bedlam on Wall Street,” screams the front page of the Los Angeles Times.

“Stocks Plunge 508 Points … Worldwide Impact,” reports The New York Times.

“The stock market crashed yesterday,” The Wall Street Journal’s front page plainly states.

Imagine it. October 19, 1987 — infamously known as “Black Monday.” Global markets plummeted so abruptly that the resulting stock market damage is believed to have been more significant than the Great Depression. Almost immediately, regulators began trying to figure out what had gone wrong.

In the process, investigators at the Securities and Exchange Commission (SEC) noticed something. The stock market didn’t have a single security to represent the broad market in the way the futures market did, with futures contracts on the S&P 500® Index. Believing that such a vehicle might have potentially minimized damage — or even avoided the crisis altogether — the SEC expressed interest in developing an entirely new kind of security.⁵

Born Out of Crisis, SPY Changed Investing Forever

Fast-forward to January 1993. A group of financial executives ring the opening bell at the American Stock Exchange (AMEX), officially launching the first US-listed exchange traded fund (ETF). The ticker SPY flashes on screen for the first time. It’s the culmination of a three-year collaboration between State Street and AMEX, later acquired by the New York Stock Exchange (NYSE) in 2008.

At last, a basket of securities tracking the performance of the S&P 500® Index had made its debut. But one person was missing from the bell-ringing celebration. Jokingly referred to as “the Plumber” by his colleagues, Jim Ross was back in his Boston office, tasked with leading a successful launch day for SPY behind the scenes.

In the weeks before launch, Jim and his State Street colleagues experienced their fair share of sleepless nights ensuring SPY’s inner workings were in good order. They ran countless tests to mimic moving 500 securities from a broker-dealer to State Street, while delivering back shares that could then be sold by the same broker-dealer on the stock exchange. It had never been done before — and no one was 100 percent sure it could be.

AMEX had initially approached State Street, the indexing pioneer and custody/clearing giant, because of its proven portfolio management expertise and money movement capabilities. But the ETF presented some unique challenges.

While ETFs trade on the exchange like stocks and bonds, the underlying fund must have the actual holdings. “If it was a US$100 million fund,” Jim shares, “it needed to have US$100 million in assets comprised primarily of the index.”

Complicating matters, because both the money and securities must move and be settled in real time, a day-of audit had to be conducted.

“Given that we were seeded not just with cash but with S&P 500® securities as well, we had to audit 500 individual securities,” Jim explains. “Normally, this whole process takes 45 days. But for the ETF to work, it needed to be completed in about 16 hours — between the 4 p.m. market close and the next morning’s market open (9:30 a.m.). Significant planning was required to ensure that the financials could be prepared and the audit could be completed.”

In the end, SPY proved successful. “It caught on with institutional trading communities, large investors, and even buy-and-hold investors,” Jim says. “They saw SPY as a way to buy into the S&P 500® in a securitized, cost-effective way.”

One of SPY’s significant early investors was located overseas — an Australian pension fund. “Back then,” Jim says, “buying a mutual fund required you to fill out an application. It was a very different process. But with SPY, you could buy on the exchange. So, suddenly, you had foreign pension funds buying and holding it to get pensioners halfway around the world exposure to US equity markets.”

Using ETFs Like SPY to Solve New Challenges

Over thirty years later, there are now more than 9,000 ETFs⁶ that track specific industries, sectors, commodities, and geographies. And yet, SPY remains the largest⁷ and most traded ETF in the world.⁸

In fact, SPY trades 4.15 times more than Apple (AAPL) — the largest security in the world by market cap.⁹ That volume, combined with the size of SPY’s assets, its liquidity, and its resilience in varying market conditions, has been vital to building portfolios for some of the world’s most sophisticated traders and in helping investors during times of market turmoil.

One of SPY’s first stress tests came in the wake of the 9/11 attacks, when the US stock exchanges shut down for six days. It was the first trading disruption longer than four consecutive days in the past 50 years.¹⁰ After markets reopened on September 17, investors heavily sold off industries like the airlines. But market participants used SPY’s price as an implied valuation for the constituents of the S&P 500®, giving the market transparency and time to adjust and correct.

Since 9/11, ETFs have added an incremental but essential source of liquidity to the market during a number of market closures, constituent trading suspensions, market dislocations, natural disasters, and human errors — providing investors with a tool to dig out of market crisis in real time.

In fact, as the market began to witness steep declines during the onset of COVID-19, SPY became the first ETF to ever trade more than $100 billion in a single day on February 28, 2020.¹¹ These elevated volumes in times of stress solidify that SPY is an essential cornerstone of the financial world, showing that investors gravitate to its deep pool of liquidity – particularly when it’s needed most.

Inspiring Innovation Among Investors

When it comes to the innovation that SPY has inspired, Jim Ross compares ETFs to the iPhone. “The iPhone platform was a significant invention, no doubt, but the real revolution has been all of the innovative ways people harness the smartphone’s power in daily life. Similarly, not all innovation in the ETF space comes from providers. A lot of it is driven by investors.”

He points to insurance companies using ETFs, rather than bonds, as investment vehicles for their general accounts. And also to financial advisors using ETFs for asset allocation and diversification planning. A number of wealth management firms use ETFs to package their investment beliefs into outcome-oriented products for their clients. ETFs have also been used to create model portfolios that give advisors the ability to outsource the investment component so that they can focus on client outcomes.

Today, despite their explosive growth, ETFs still represent only 13.92% of the entire investable market.¹² But with their inherent liquidity advantages, because of intraday trading and transparency on pricing, ETF adoption continues to trend upward. In 2023, 90.1% of advisors recommend using ETFs in their portfolios, and 49.7% of advisors are looking to increase their usage of ETFs in the next twelve months.¹³

From Revolution to Evolution

SPY paved the way for a more democratized investing approach — opening the door to markets that were inaccessible to the majority of investors prior to 1993.

Now more than 30 years later, the ways investors use ETFs continues to evolve. ETFs have become key building blocks when making asset allocation decisions, and they’ve allowed financial advisors to focus on investor outcomes with greater efficiency — through targeted exposure to match portfolio goals and improved transparency of underlying holdings, enabling streamlined due diligence.

How are investors currently using SPY and other ETFs?

Liquidity
SPY, the world’s most liquid ETF, trades $34 billion a day, on average.¹⁴ This gives investors the ability to tap into SPY’s unmatched liquidity, which can help investors get in and out of markets fast, easily, and at a relatively attractive cost.

Diversification
ETFs usually track an index, so investors can gain exposure to a basket of securities in a single trade. Like mutual funds, SPY and other ETFs can help investors efficiently and cost-effectively build diversified portfolios.

Managing Risk
The broad array of ETFs available today makes possible risk management approaches for individuals and smaller institutions that only large institutional investors could previously access.

Securities Lending
Investors can use SPY to potentially generate an additional source of income via securities lending, or the process of loaning shares to other investors. Securities lending is a key aspect of capital markets activity that facilitates settlement, injects liquidity, and fosters confidence for risk taking.

Flexibility in Execution
Because of SPY’s high trading volume and liquidity, the depth of SPY’s secondary market enables a wide range of execution strategies and offers implicit transaction cost benefits across those execution strategies.

Any way you look at it, the revolution SPY sparked has been a win for investors. “When this all started, we thought that the ETF would be used mostly by trading institutions or maybe some hedge funds,” Jim says. “Boy, were we wrong.”