By Leslie N. Masonson, MBA
Two of the most significant events in the investment world over the past century, which have had a positive impact on everyday investors, were the introduction of the first mutual fund, MFS Massachusetts Investors Fund, in 1924, and the launch of the first exchange-traded fund (ETF), SPDR S&P 500 ETF Trust (SPY), on January 22, 1993. Before these milestones, mutual funds had a monopoly for 69 years. However, with the arrival of ETFs, a new player emerged on the field, offering more options for investors.
Let’s make sure we’re all on the same page before we continue. What exactly is an ETF? It’s a portfolio of stocks held as a pooled investment vehicle in a registered investment company. ETFs can be bought or sold throughout the day at current prices through a brokerage account on stock exchanges. They are registered and regulated by the SEC under the Investment Company Act of 1940.
Unlike mutual funds, which set their price at the end of the trading day (4 p.m.) are quoted at NAC and can’t be traded during the day, ETFs provide the flexibility to trade them whenever the stock exchanges are open. There’s another similar-sounding vehicle called exchange-traded notes (ETNs), but they are debt instruments and not included in our discussion.
ETFs offer a wide range of choices, including major indexes, countries, sectors, themes (such as Fintech, Sustainability, and Disruptive Technology), factors, agriculture, fixed income, precious and industrial metals, currencies, leveraged and inverse options, absolute returns, non-transparent, synthetic, volatility, and even single stock ETFs. This variety caters to the needs of almost any investor or trader. However, the abundance of choices may overwhelm some investors. This new blog will be helpful in sorting out the options and making decisions easier.
When ETFs were first launched and during the first five years, there wasn't much investor interest in SPY or the other 79 ETFs that entered the market. The mutual fund industry, with its long-established reputation and marketing power, posed a challenge for these new competitors. As a young investor in 1970, I remember most mutual funds charging a front-end load of averaging around 7% on their class A shares. This meant that only $930 of my $1,000 investment would actually be working on day one, which wasn't an ideal way to start my stock market journey.
Decades ago, investors' choices were limited to common and preferred stocks, bonds, options, and mutual funds. However, the introduction and growth of ETFs changed this landscape forever. As of May 19, 2023, the SPY ETF alone has amassed $389.5 billion in assets, while the number of ETFs in the United States has reached 3,145, with a total value of just over $7 trillion. Despite this growth, mutual funds still dominate with $27 trillion in assets. Closed-end funds, on the other hand, hold only $309 billion in assets. Over the past decade, both institutions and retail investors have migrated to ETFs, pouring in a total of $3.7 trillion.
Back in the 1960s and 1970s, stockbrokers charged hundreds of dollars for stock transactions. However, the introduction of discount commissions on May 1, 1975 (known as “May Day”), changed the game, allowing firms to set their own commissions instead of pre-set prices. Muriel Siebert was the first to offer discount brokerage services at her firm. Today, investors and traders enjoy commission-free trades, have access to a vast universe of investment alternatives at their fingertips, and can track their portfolios in real-time on their smartphones. They can also analyze stocks and ETFs with powerful softwares like VectorVest.
In our upcoming articles, I will delve into all aspects of ETFs, providing valuable information on their various types, diverse families, tips for utilizing the ETF viewer effectively, creating watchlists and strategies using VectorVest ETFs, understanding market timing for optimal buying and selling decisions, and correctly navigating leveraged and inverse ETFs, among other topics. We invite you to stay tuned to the VectorVest blog for this exciting ETF-focused content. Our next article will specifically highlight the significance and remarkable growth of ETFs over the past twenty-five years.
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