Many investors don’t have the time or inclination to invest in individual stocks. The amount of research needed to keep track of a well-diversified portfolio of 25 stocks or more is considerable, and even with cutting-edge investing tools to help you, it can be a challenge to keep up with the latest news on every company in which you hold shares.
That’s why many investors turn to alternatives to individual stocks for their investing. In particular, exchange-traded funds offer the broad-based stock exposure investors want, with many ETFs holding shares of hundreds or even thousands of different companies. Yet because they trade on major stock exchanges just like an individual stock, you don’t need to have a separate account or worry about some other process for making investments.
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That simple approach for investors to get diversification within a single vehicle has made ETFs a can’t miss investment for millions of investors. And no matter what ETFs you might hold in your portfolio, they all owe a debt to the one that broke the trail for all the others that came after it. That’s the SPDR S&P 500 ETF Trust ETF (NYSEMKT: SPY), and the original ETF is still making a huge impression on the industry while having helped countless investors to find riches. In March’s look at ETFs for the Voyager Portfolio, our first look will be at SPDR S&P 500, and this first in a series of articles will focus on how the ETF got its start and what it took for investors to gain confidence in the fund.
To understand how SPDR S&P 500 got its start in 1993, you have go back about five years. In the aftermath of the stock market crash in October 1987, a host of economists and policymakers tried to figure out the root causes of the market plunge and what might have helped stop it. A product development professional at the American Stock Exchange wrote a report that argued that having a financial institution that specialized in trading a basket of stocks that corresponded to popular stock market indexes might have been enough to prevent the program-trading algorithms that contributed to the severity of 1987’s crash from causing as much damage as they did.
This idea took hold, and in the ensuing years, several American Stock Exchange colleagues as well as a law firm, a trading specialist, and State Street (NYSE: STT) all got together with financial market regulators to flesh out what such an investment vehicle might look like. What eventually set ETFs apart from other investments was their ability to create or redeem shares in blocks through in-kind transfers of the underlying stocks.