To fully understand the function of ETFs, it can be helpful to take a look at the relatively brief history of ETFs. The first ETF was SPY, which was designed to track the well-known S&P 500 Index. This fund first started trading in 1993. The shares of SPY are commonly referred to as “S&P 500 Spyders.” The fund became—and today remains—the largest and most actively traded ETF; daily trading volume in SPY shares routinely exceeds 120 million shares.
In May 1995, MidCap Spyders were launched under the ticker MDY. The term “mid cap” has to do with something known as “capitalization.” Capitalization is simply the number of shares outstanding for a given security times the price of that security. Large companies with millions of shares outstanding typically fall into the “large cap” category. Small companies with fewer shares outstanding and/or a low stock price tend to fall into something known as the “small cap” category.
Therefore, “mid cap” encompasses stocks that fall somewhere in the middle of the capitalization spectrum. Mid-cap stocks trade similarly to large-cap and small-cap stocks, but at times will outperform or underperform.
In 1996, Barclays Global Investors, a subsidiary of Barclays PLC, was the first ETF sponsor to offer investors a way to access foreign stock markets. Their line of country ETFs offered investors a simple way to invest directly in stock indexes for a given individual country, such as Japan, Taiwan, Brazil, and Germany just to name a few.
In 1998, State Street Global Advisors introduced the "Sector Spiders," which follow the nine industry sectors covered within the S&P 500 index. These ETFs afforded investors the opportunity to invest in specific segments of the market, such as Energy, Finance, Utilities, and Technology.
ETFs using the SPDR acronym now also encompass a variety of categories such as stock indexes, sectors, bonds, real estate, commodities, and international funds. Also in 1998, the "Dow Diamonds" (traded under ticker DIA) were introduced. This was the first ETF to track the Dow Jones Industrials Average, the price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. Another important ETF was launched in 1999. Ticker QQQ—commonly referred to as “the cubes” or “the Qs”—tracks the movement of the NASDAQ-100—an index of the 100 largest, most actively traded U.S. companies listed on the NASDAQ—and has become immensely popular among investors.
In 2000, Barclays Global Investors launched a line of ETFs under the name iShares. Within five years, iShares became the largest sponsor of ETFs. Like SPDRs (“Spyders”), these iShares ETFs cover a variety of market segments, including capitalization (large-cap, small-cap, etc.), industry sectors, foreign stocks, etc. Over the years, ETFs have proliferated, tailored to an increasingly specific array of regions, sectors, styles (e.g. large-cap, mid-cap, etc.), commodities, bonds, futures, and other asset classes.
As of April 2015, an industry snapshot showed the following:
- Total # of ETFs = 1,496
- Total Assets = $2.13 trillion
- # of ETFs with assets > $10 billion = 51
- # of ETFs with assets > $1 billion = 263
- # of ETFs with assets > $100 million = 793
- % of ETFs with asset > $100 million = 53%1
It should be noted that while the 51 ETFs with more than $10 billion in assets represent only 3.0% of the ETFs available, they hold 54% of overall ETF assets. In addition, while the number of ETFs and the total size of ETF assets have grown spectacularly, the majority of all investment dollars are concentrated in the largest funds:
- The 10 Largest ETFs hold 25% of Industry Assets Under Management
- The 20 Largest ETFs hold 36% of Industry Assets Under Management
- The 30 Largest ETFs hold 43% of Industry Assets Under Management
- The 100 Largest ETFs hold 68% of Industry Assets Under Management2
To put all of this in perspective, note that:
- 68% of the industry assets are held in 100 ETFs.
- 31% of the industry assets are spread out among the remaining 1,396 funds.3
In other words, not all ETFs are as actively traded as some others. Here is a list of the ETFs that are typically among the most actively traded.4
|1||SPY||SPDR S&P 500||151,310,344|
|2||EEM||iShares MSCI Emerging Markets ETF||69,003,305|
|3||GDX||Market Vectors TR Gold Miners||63,276,910|
|4||XLF||Financial Select Sector SPDR||58,890,617|
|5||EWJ||iShares MSCI Japan ETF||48,905,102|
|7||IWM||iShares Russell 2000 ETF||41,551,730|
|8||EFA||iShares MSCI EAFE ETF||30,340,695|
|9||XLE||Energy Select Sector SPDR||27,343,949|
|10||VWO||Emerging Markets ETF||23,545,201|
|11||AMLP||Alerian MLP ETF||20,817,670|
|12||HYG||iShares iBoxx $ High Yield Corporate Bond ETF||15,407,174|
|13||XLU||Utilities Select Sector SPDR||14,805,079|
|14||XLI||Industrial Select Sector SPDR||14,593,027|
|15||XLK||Technology Select Sector SPDR||14,478,701|
|16||JNK||SPDR Barclays Capital High Yield Bond ETF||14,387,688|
|17||XLV||Health Care Select Sector SPDR||13,761,512|
|18||XLP||Consumer Staples Select Sector SPDR||13,271,178|
|20||TLT||20+ Year Treasury Bond ETF||9,466,495|
Of course, this is not static. As you can see, the history of ETFs has been an eventful one, full of rapid innovation and development, as well as some ETFs closing, making it likely that ETFs will continue to evolve in the years to come.
Now that you know where ETFs came from, move on to the next article in this series to find out how shares of ETFs are created and traded.