The ETF Revolution Is in Full Swing: Consider Educating Yourself Before Investing

By Leslie N. Masonson, MBA

The Industrial Revolution from 1760 to 1840 unleashed a sea-change of dramatic and unheard-of shifts in the industrial growth and dominance of the United States. There are of course two more recent impactful events that have changed our way of interacting, working, and shopping.  The first, of course, is the introduction of the Internet in 1993 to 1994 in its rudimentary form, and it’s unbelievable advancement in the last 30 years as evidenced by the usefulness and time saving value of Google search, Amazon shopping, real time stock prices, self-education using YouTube, and generally improve life by becoming proficient in the use of the Internet.  And now, we are in the infancy of the Artificial Intelligence ecosystem with the introduction of ChatGPT-4 and others.  AI will probably turn out to be the most impactful advancement of all, and certainly applicable to the investment field from the choice of vehicles to the potential development of strategies not currently in use.

 In the world of finance, few phenomena have captured the imagination of financial analysts, institutions, hedge funds and retail investors alike, as much as the remarkable expansion in the number of exchange-traded funds (ETFs) over the past thirty years.  Unexpectedly, the first mutual fund creation in 1924 turned out to be the precursor of the transformative development of the State Street SPDR S&P 500 ETF (SPY) in January 1993.

However, mutual funds had a formidable 69-year head start.  And with assets totaling $21 trillion today, mutual funds have provided the masses with an easy way to invest for almost a century.  Breaking into that successful and well-oiled investment model with a competitive index product proved to be an uphill battle in the first decade since inception.

Similar to the first passively-managed index fund offered for sale in August 1976 by the Vanguard Group which was headed by John Bogle, the founder, ETFs had a rough few years before they gained market acceptance.  Initially, Bogle’s First Index Trust (now called the Vanguard 500 Index Fund) was dubbed “Bogle’s folly,” as only $11.3 million in assets were collected initially against a goal of $150 million. Almost everyone thought this poor launch would be short-lived.  However, Bogle’s dogged persistence paid off in spades, as the ETF version of this fund (VOO) has $382.7 billion in assets today, and is the largest US ETF and has the third highest average daily trading volume at 68.8 million shares.

Only the triple-leveraged ProShares UltraPro QQQ (TQQQ) and their Short QQQ (SQQQ) have more volume at 111.7 million and 111.5 million shares a day, respectively. SPY was the start of the indexing revolution that brought investing to another level.  Popular and heavily marketed active mutual funds had high expenses and loads; however, over 80% of the managers could not beat their benchmarks over 20 years, so index funds which are passively managed emerged to strip away those assets and build billion-dollar competitors.

Likewise, ETF recognition sputtered in the early years with limited interest, especially from retail investors whose financial advisors were slow to recommend them, as they were not the best way to generate revenue for their firms compared to selling front- loaded mutual funds with multiple share classes.   However, as the advantages of ETFs become more well-known, investors were drawn in.

Simply stated, ETFs were indexes of stocks like the S&P 500 and Nasdaq 100, had no loads, were tradable during the business day, were tax-efficient, had low annual expense ratios, and offered low bid-to-ask spreads. Since their birth, the number of ETFs has exploded to 3,148 with total assets of $6.9 trillion. This indicates their popularity, and overwhelming acceptance, especially by advisors and retail investors.

Moreover, ETFs have sparked innovation in the investment industry. New types of ETFs have emerged, offering leveraged or inverse exposure, or offering “buffered” features to mitigate against loss while capping the upside, enabling investors to profit from any strategy even in market declines. Moreover, thematic ETFs have gained market share, allowing investors to target the latest developments such as cybersecurity, genomics, cloud computing, robotics or artificial intelligence. Also, more and more active ETFs are coming to market offering investors another opportunity to bet on portfolio managers with a hot hand. 

At present, there are over 200 sponsors offering many ETFs of all stripes, and the list keeps growing. Looking to the future, the growth curve of ETFs is continuing to slope higher. New ETFs continue to come to market, as more investors become aware of their benefits while also attracting newbies with money to invest. The current ETF revolution is definitely a game-changer, providing participants with an array of investment options and opportunities never before available.

Investors lacking knowledge about ETFs and those who are hesitant about exploring something new are missing the boat on the future of American ingenuity, whether it be semiconductors, artificial intelligence or disruptive technologies or something else. Now is the time to educate yourself and take part in the growth opportunities available.  With so many varied ETFs available, there is certainly a handful that would be of interest to any investor or trader.  So, give it a look, if you haven’t already. The next article will delve into ETF basics and characteristics.

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