WEBVTT - The Sleeper 0:00:07.000 --> 0:00:09.760 Hey, this is Trillions presents the e t F Story. 0:00:10.240 --> 0:00:13.280 I'm Joel Weber and I'm the editor of Bloomberg Businessman. 0:00:14.320 --> 0:00:16.599 During the series, we've been tracing the story of the 0:00:16.600 --> 0:00:22.800 exchange traded fund from its origin in the SEC's market 0:00:22.840 --> 0:00:26.800 break report, to building its legal structure to finally bringing 0:00:26.840 --> 0:00:31.160 it to market. Today, it remains the largest GTF with 0:00:31.200 --> 0:00:34.960 two D seventy billion in assets. But when Spy first 0:00:35.040 --> 0:00:38.360 launched in let's just say, it didn't exactly take the 0:00:38.400 --> 0:00:43.199 world by storm. Gary Eisenric is a managing partner at 0:00:43.280 --> 0:00:47.400 fair Field Advisors. At the time of spies launch, he 0:00:47.560 --> 0:00:51.479 was a specialist at spear Leeds and Kellogg tasked with 0:00:51.560 --> 0:00:56.120 providing liquidity as the product's first market maker. A market 0:00:56.120 --> 0:00:58.959 maker is someone who matches buyers and sellers and then 0:00:59.000 --> 0:01:02.320 takes a small cut. On its first day, Spy traded 0:01:02.360 --> 0:01:05.200 about a million shares, and eisen Rick says there was 0:01:05.240 --> 0:01:08.200 a lot of fanfare. There was the big spider, and 0:01:08.240 --> 0:01:10.679 there's all the T shirts and the hats, and a 0:01:10.720 --> 0:01:12.720 lot of dignitaries and a lot of people because it 0:01:12.760 --> 0:01:16.039 was a new issue. And then they put up the 0:01:16.080 --> 0:01:18.000 first print. It was two hundred shares and they had 0:01:18.000 --> 0:01:19.880 it on the ticker tape. I've got a copy of it, 0:01:19.920 --> 0:01:22.360 and they had a few of those, and and so 0:01:22.400 --> 0:01:26.080 I have the initial thing, and then some initial orders happened, 0:01:26.080 --> 0:01:31.720 and then it just sat. Yep, it just sat. Then 0:01:31.760 --> 0:01:35.319 over the next six months that volume went down very 0:01:35.440 --> 0:01:38.679 rapidly to where it was trading eighteen thousand years a day. 0:01:38.920 --> 0:01:42.240 Eric Baltunas and E. T. F analysts with Bluemerican Intelligence 0:01:42.240 --> 0:01:46.279 and our resident historian, says it was disappointing, and rumors 0:01:46.280 --> 0:01:49.400 about whether Spy would live on became spread. So kind 0:01:49.400 --> 0:01:52.440 of had this big hype first day, and but then 0:01:52.440 --> 0:01:55.320 it kind of trailed off, and I don't know if 0:01:55.320 --> 0:01:57.000 they were looking to close it. I heard that, but 0:01:57.040 --> 0:01:59.040 I'm not sure if that's totally true that. In fact, 0:01:59.040 --> 0:02:00.640 I had a number of people say, Gary, are wasting 0:02:00.640 --> 0:02:02.960 your time. It's not gonna make it. But I really 0:02:02.960 --> 0:02:04.800 felt strongly that it was a good enough product. It 0:02:04.880 --> 0:02:07.120 was only twenty five basis points and to be able 0:02:07.120 --> 0:02:09.160 to go in and trade that intra day was great. 0:02:09.800 --> 0:02:13.120 So getting it adopted was the hard part. So how 0:02:13.120 --> 0:02:15.560 did they do it? How did Spy go from treating 0:02:15.600 --> 0:02:19.240 eighteen thousand shares a day to being the world's largest ETF. 0:02:21.120 --> 0:02:24.799 Gary Eisenrich was leading these guerilla marketing efforts. He said 0:02:24.840 --> 0:02:28.520 he was able to sell people on spiders structure, and 0:02:28.520 --> 0:02:31.000 when those people had success with it, they ended up 0:02:31.040 --> 0:02:33.480 telling others. Besides, if they have a good experience trading 0:02:33.560 --> 0:02:35.920 hunter shares, they're going to tell the guy that's going 0:02:35.960 --> 0:02:39.200 to trade ten thousand shares. And that's basically how Spiders 0:02:39.360 --> 0:02:42.120 was from word of mouth and and a cheap product, 0:02:42.240 --> 0:02:45.760 and and people that money managers that we didn't want 0:02:45.760 --> 0:02:48.040 to buy an expensive product that had an embedded hundred 0:02:48.040 --> 0:02:49.840 basis points. They wanted to have it at twenty five 0:02:49.880 --> 0:02:52.239 basis points. And it sort of had to be word 0:02:52.240 --> 0:02:57.079 of mouth because brokers had no incentive to sell Spy. 0:02:57.240 --> 0:02:59.359 So he hit the road with people from the American 0:02:59.400 --> 0:03:03.280 stock Angine or am X to talk about Spy and 0:03:03.280 --> 0:03:04.880 and it was a sale on the n X too. 0:03:04.919 --> 0:03:07.120 I mean, it didn't have the best reputation of that, 0:03:07.160 --> 0:03:09.720 you know, and I don't know that that was warranted 0:03:10.000 --> 0:03:12.079 at all. But I would go to people places and 0:03:12.120 --> 0:03:13.919 they say, I'm not trade on the annex. But to 0:03:13.960 --> 0:03:16.400 get that going, and after a while you would talk 0:03:16.440 --> 0:03:18.919 to people and say I will bake you with fair 0:03:19.040 --> 0:03:22.799 market and trade. So it caught on because people were 0:03:22.840 --> 0:03:25.880 happy with the experience, they were happy, they were happy 0:03:25.960 --> 0:03:29.560 with the return that they were getting. Eric says, people 0:03:29.760 --> 0:03:34.320 including Eisenrich, who are advocating for SPY early on were 0:03:34.320 --> 0:03:37.480 true believers in the product, and that got things moving. 0:03:37.560 --> 0:03:43.440 That's important because repetition, guerrilla marketing, that stuff matters. But 0:03:43.520 --> 0:03:46.240 then you need that plus some kind of an outside catalyst. 0:03:46.320 --> 0:03:48.720 And the outside catalyst was the nineties economy kicked in 0:03:48.800 --> 0:03:52.920 right around and that's just a good year to be 0:03:53.040 --> 0:03:56.720 offering SMP hundred exposure. So you had that outside catalyst 0:03:56.800 --> 0:03:59.360 mixed in with the guerrilla marketing at the bottom from 0:03:59.360 --> 0:04:01.840 true believers, and that's when you started to see the 0:04:01.840 --> 0:04:05.080 assets grow and then from there basically double disassets every 0:04:05.160 --> 0:04:08.760 year for the next whatever decade. Whether it's a happy 0:04:08.800 --> 0:04:10.760 accident or whether it was the hard work of the 0:04:10.760 --> 0:04:13.800 folks at the m X really getting everybody to play 0:04:13.840 --> 0:04:17.720 ball at the same time for their own enlightened self 0:04:17.760 --> 0:04:21.760 interest reasons, it wouldn't have ever worked. Dave Nodded, the 0:04:21.880 --> 0:04:25.360 long time managing director of et F dot Com, says 0:04:25.400 --> 0:04:28.839 there was skepticism lurking in the background. As Spy and 0:04:28.920 --> 0:04:32.320 others moved into the marketplace, the skepticism was around whether 0:04:32.400 --> 0:04:34.359 or not you would ever get both sides of the 0:04:34.440 --> 0:04:36.599 market to participate. And what I mean by that is 0:04:36.640 --> 0:04:40.520 you had to have institutions willing to buy these things, 0:04:40.520 --> 0:04:43.760 willing to buy Spy to get their SMP exposure. But 0:04:43.839 --> 0:04:46.479 at the same time you needed to have people willing 0:04:46.560 --> 0:04:50.440 to be market makers and authorized participants that would arbitrage 0:04:50.520 --> 0:04:54.159 out price discrepancies. And I will admit when I first 0:04:54.160 --> 0:04:58.080 started waiting into this, I was enormously skeptical that that 0:04:58.279 --> 0:05:01.120 second part would show up, because there is a real 0:05:01.240 --> 0:05:03.120 chicken in the egg problem. Right If you only end 0:05:03.160 --> 0:05:05.960 up with one institution that buys fifty million dollars of 0:05:06.040 --> 0:05:08.880 them and then they never trade again, then the second 0:05:08.920 --> 0:05:12.080 side that that ap and market maker side never comes online, 0:05:12.400 --> 0:05:15.440 and the whole thing is a failure. So once Spy 0:05:15.640 --> 0:05:18.480 kind of took off and other people thought to use 0:05:18.600 --> 0:05:21.599 this structure in and track other things, not just the 0:05:21.680 --> 0:05:24.960 SMP five hundred. So one of those things was international, 0:05:25.880 --> 0:05:28.599 and so they had a line of ets from Morgan 0:05:28.680 --> 0:05:31.640 Stanley that came out that were called Webbs, Bob Tole 0:05:31.760 --> 0:05:34.920 began working with Nate Most on this very project from 0:05:34.960 --> 0:05:38.640 Morgan Stanley. So Nate and I start formulating what became 0:05:38.680 --> 0:05:41.800 eventually the filing for WEBS. I have to work with 0:05:41.920 --> 0:05:46.320 Nate because he's so far advanced into thinking compared to 0:05:46.360 --> 0:05:51.120 anybody else at Morgan Stanley. Even so, it's probably October 0:05:51.200 --> 0:05:53.360 ninety three. We get back together right after the summer, 0:05:53.640 --> 0:05:56.680 and we're gonna take and create what we know from 0:05:56.680 --> 0:06:01.760 our commodities world is a receipt. We draft the prospectives, 0:06:01.800 --> 0:06:05.159 We worked with the lawyers from Solomon and Cromwell and 0:06:06.040 --> 0:06:09.359 Lo and Behold, we designed the filing that goes in 0:06:09.800 --> 0:06:15.000 its world equity benchmark shares hence webs. Toll says he 0:06:15.080 --> 0:06:19.080 was very strategic about presenting this new webs product. He 0:06:19.200 --> 0:06:22.760 and Nate Most carefully educated people about what the product 0:06:22.839 --> 0:06:25.320 would really look like. One of the things that was 0:06:25.360 --> 0:06:29.279 so paramount in our thought process was that we wanted 0:06:29.440 --> 0:06:32.080 e t S to be a no fail environment. Even 0:06:32.120 --> 0:06:35.360 though we were trading international securities and packaging them all up. 0:06:35.800 --> 0:06:38.960 We didn't want to fail. Long story short, Spy was 0:06:39.000 --> 0:06:41.480 always known as the Spiders even when M d y 0:06:41.600 --> 0:06:43.560 CA met. That was also sort of the spiders. That 0:06:43.640 --> 0:06:46.599 was just what they called them. So when they Morgan 0:06:46.680 --> 0:06:49.600 Stanley wanted to put out something that used this this structure, 0:06:50.360 --> 0:06:53.440 but they wanted to have it track international markets, you know, 0:06:53.520 --> 0:06:56.880 like Brazil and Mexico and that kind of thing, because 0:06:57.200 --> 0:06:59.800 traders like to trade the whole country at once and 0:07:00.120 --> 0:07:03.120 just pick a stock. When they came out with their 0:07:03.440 --> 0:07:07.240 idea for these international type ETFs, they didn't have They 0:07:07.240 --> 0:07:10.000 couldn't use Spider because that's the state street name. So 0:07:10.040 --> 0:07:11.640 they said, you got to come up with a different 0:07:11.840 --> 0:07:15.920 term so that there's no investor confusion. So the first 0:07:16.040 --> 0:07:19.240 use of the name Exchange Traded Funds is in the 0:07:19.240 --> 0:07:22.360 web perspectives because we had to create something different. And 0:07:22.400 --> 0:07:25.240 so that's what's interesting is that the acronym and the 0:07:25.360 --> 0:07:29.640 name wasn't really put out there until six years after 0:07:30.280 --> 0:07:34.520 bloom and most you know, actually filed for it. WEBBS 0:07:34.600 --> 0:07:37.960 was important because it coined the term exchange traded fund 0:07:38.760 --> 0:07:42.160 but it was also significant because WEBBS was driven by 0:07:42.240 --> 0:07:47.800 client demand, not a says. Unlike Spy, which was innovation driven, 0:07:48.280 --> 0:07:54.000 WEBBS was addressing specific demands. WEBBS was wells far ago 0:07:54.080 --> 0:07:58.760 of Brian Stanley realizing that there was this demand from 0:07:58.760 --> 0:08:02.440 a sophisticated, instance outional trading market that wanted exposure to 0:08:02.520 --> 0:08:05.760 international markets in a way that they couldn't get access. 0:08:05.840 --> 0:08:07.520 And the way the reason they couldn't get access was 0:08:07.560 --> 0:08:11.120 primarily a custody problem. Um, you know, back in those days, 0:08:11.160 --> 0:08:14.280 if you wanted to trade uh, you know Argentina, which 0:08:14.360 --> 0:08:16.480 I think was one of the very first in the 0:08:16.520 --> 0:08:19.040 first ones in the sleeve, you had to have a 0:08:19.080 --> 0:08:21.440 local desk that knew how to trade Argentina. You had 0:08:21.480 --> 0:08:23.560 to have a local bank that was going to custody 0:08:23.600 --> 0:08:26.680 those assets. Maybe you know, Bank of New York might 0:08:26.760 --> 0:08:31.160 have an affiliate relationship with somebody down there, but it 0:08:31.240 --> 0:08:33.840 was it was a pain in the neck to include 0:08:34.080 --> 0:08:37.920 Argentina in your international portfolio. And ms c I was 0:08:38.040 --> 0:08:40.120 really trying to build out where then Morgan Stanley was 0:08:40.160 --> 0:08:43.440 really trying to build out their international chops, if you will. 0:08:43.800 --> 0:08:47.160 And so what they did was solicit from their biggest 0:08:47.200 --> 0:08:49.640 clients where do you want to trade? And so you 0:08:49.679 --> 0:08:52.400 look at that list of the fifteen or sixteen initial 0:08:52.440 --> 0:08:57.960 webs products, it's a bizarre list. Also, this structure, although 0:08:57.960 --> 0:09:01.960 it followed the same rapper concept, spy didn't follow the 0:09:02.040 --> 0:09:06.160 same unit Investment trust or u I T structure. Well, 0:09:06.160 --> 0:09:09.319 the u I T structure is extremely restrictive, right and 0:09:09.840 --> 0:09:11.480 for the SMP five hundred, and makes a ton of 0:09:11.520 --> 0:09:14.120 sense because you're never gonna not own one of the 0:09:14.160 --> 0:09:16.679 five D stocks in the SMP five hundred. They're all liquid. 0:09:17.080 --> 0:09:20.600 Everybody obviously wants all that exposure. So instead WEBS used 0:09:20.640 --> 0:09:24.240 mutual funds because mutual funds were less limiting than a 0:09:24.360 --> 0:09:27.480 u I T. When working with international markets, when you 0:09:27.559 --> 0:09:30.959 talk about Argentina, it's a little bit different, and the 0:09:31.000 --> 0:09:34.880 custody issues in some of those countries were in the 0:09:34.880 --> 0:09:39.079 mid nineties still intractable. I mean, I literally remember a 0:09:39.520 --> 0:09:43.440 phone call in the mid nineties with our custodian bank 0:09:43.480 --> 0:09:46.600 in India at Wells Fargo Nico, who was talking about 0:09:46.640 --> 0:09:48.320 the fact that we had to dec a whole bunch 0:09:48.320 --> 0:09:50.920 of trades because the courier got hit by a truck 0:09:51.360 --> 0:09:53.120 and there and all of the trades were on a 0:09:53.160 --> 0:09:56.320 paper in a knapsack going between the brokerage and the 0:09:56.320 --> 0:09:59.480 custody shop. So like that's the kind of stuff we're 0:09:59.480 --> 0:10:03.160 dealing with. In that environment, you had to have some 0:10:03.360 --> 0:10:06.160 latitude again, not that you weren't managing an index fund. 0:10:06.160 --> 0:10:08.640 You were managing an index fund. But um, I think 0:10:08.640 --> 0:10:11.160 there's a misconception that managing an index fund means that 0:10:11.240 --> 0:10:14.640 you own precisely everything exactly when you're supposed to it exactly. 0:10:14.679 --> 0:10:17.679 They're a price and that's just not true unless you're 0:10:17.679 --> 0:10:19.640 a U I T, in which case you have to 0:10:19.679 --> 0:10:22.440 do it that way. Bob Tole says, the managing director 0:10:22.440 --> 0:10:25.800 at Morgan Stanley, didn't think et s would amount to anything, 0:10:26.040 --> 0:10:31.240 so he was happy to unload them. Eventually, Barkley's Global 0:10:31.280 --> 0:10:34.719 Investors bought webs from Morgan Stanley and it was a 0:10:34.880 --> 0:10:40.559 steal a dollar, if I remember correctly, a dollar. Yeah. 0:10:40.840 --> 0:10:43.280 I had to have four phone calls with Bob Diamond, 0:10:43.280 --> 0:10:45.480 who was the president of Barclays in London, who was 0:10:45.520 --> 0:10:48.040 ex Morgan Stanley and a friend of mine. And he 0:10:48.120 --> 0:10:50.560 calls me four times to say, you know, what are 0:10:50.559 --> 0:10:53.000 they trying to do to me? You know, what's where's 0:10:53.000 --> 0:10:56.120 the land mine? Right? And I'm going just by it? 0:10:56.480 --> 0:10:59.480 I said, he goes. I said, what do you want? 0:10:59.520 --> 0:11:01.640 As bark plays, he said, we don't have a retail 0:11:01.679 --> 0:11:04.680 footprint in the United States. The largest capital markets in 0:11:04.720 --> 0:11:09.839 the world, and nobody knows Barclays from IOTA right. B 0:11:10.040 --> 0:11:13.560 g I is named at But if you asked a 0:11:13.600 --> 0:11:15.840 person on the on the street who the heck Barclays 0:11:15.880 --> 0:11:18.319 bank was, they they look at you like, I don't know. 0:11:19.280 --> 0:11:24.200 So here was the golden opportunity for Barclays to develop 0:11:24.240 --> 0:11:28.200 a retail brand in the United States for a dollar 0:11:28.800 --> 0:11:32.959 and get paid for doing it. Webbs eventually became I 0:11:33.120 --> 0:11:37.040 Shares after the Barclay's acquisition, and Noddix says, this is 0:11:37.080 --> 0:11:39.880 when the brand really started to change. And one of 0:11:39.920 --> 0:11:42.280 the consultants working in that process was a guy named 0:11:42.360 --> 0:11:45.200 Lee Cranefis. He was a consultant as part of that process, 0:11:45.280 --> 0:11:47.920 working with Patty Dunn, who would later become the head 0:11:48.000 --> 0:11:51.720 of b G I. And you know, he, I think 0:11:51.760 --> 0:11:54.000 recognized even more than me or any of the people 0:11:54.040 --> 0:11:57.400 who were in the business at the time, that these 0:11:57.400 --> 0:12:02.079 products were actually a solution not just for those big institutions, uh, 0:12:02.120 --> 0:12:05.000 and not just for people who needed to equitize cash, 0:12:05.080 --> 0:12:08.520 but but they were products that could solve real long 0:12:08.640 --> 0:12:13.120 term asset allocation investment needs for clients. And was really 0:12:13.120 --> 0:12:15.920 the guy who pushed for the rebranding of those into 0:12:15.960 --> 0:12:19.520 what is inarguably a more retail brand, I Shares Toll 0:12:19.600 --> 0:12:21.560 says Lee Craned. This was lucky to be in the 0:12:21.559 --> 0:12:25.120 position he was in as I Shares became more retail focused. 0:12:25.440 --> 0:12:27.680 But he wasn't the only reason for its success. It 0:12:27.800 --> 0:12:31.600 was the money that the AMEX kept telling him to spend. Right, 0:12:31.920 --> 0:12:34.480 and so what's Lee do? He tries a couple of things. 0:12:34.559 --> 0:12:38.120 If you remember, at one point every bus stop in 0:12:38.200 --> 0:12:42.719 Lower Manhattan from n y U South had an EYE 0:12:42.760 --> 0:12:45.760 Shares sign on it, and people kept saying, what does 0:12:45.800 --> 0:12:49.360 I Shares? Right? Then they started sponsoring circus sole events 0:12:49.400 --> 0:12:53.080 and then they so they were targeting. In my opinion, 0:12:53.480 --> 0:12:56.360 League got the luck of the draw. The real brains 0:12:56.640 --> 0:13:01.160 who I think deserves tremendous amount of credit is Bruce Levine, 0:13:01.679 --> 0:13:06.040 Jim Polison, Craig Friedman. All of those guys saw the 0:13:06.160 --> 0:13:11.680 vision of how to convert basically an institutional money manager, 0:13:11.720 --> 0:13:15.240 which was the old Wells Fargo Investment Advisors, into a 0:13:15.320 --> 0:13:19.560 retail brand name. Today, I Shares, which is now owned 0:13:19.559 --> 0:13:22.480 by black Rock, is the largest et F brand not 0:13:22.679 --> 0:13:25.600 exaists when you step back and think about it. Spy 0:13:25.840 --> 0:13:28.280 paved the way for I shares. If Spy had come 0:13:28.280 --> 0:13:31.040 out and continued to fail and not gotten any traction, 0:13:31.120 --> 0:13:33.160 I don't think there would have been a lot of 0:13:33.280 --> 0:13:36.920 move to to push webbs forward. Even so, it's a 0:13:36.960 --> 0:13:39.400 little bit of a miracle to me that Webbs ever launched. 0:13:39.520 --> 0:13:42.640 It wasn't something that I recall at the time. There 0:13:42.720 --> 0:13:45.960 was a tremendous amount of management enthusiasm and excitement about 0:13:46.360 --> 0:13:48.080 it was seen as sort of a bit of a 0:13:48.120 --> 0:13:50.720 flyer that we were doing to service a bunch of 0:13:50.840 --> 0:13:53.760 very high end customers. Not says it took a while 0:13:53.800 --> 0:13:56.640 for these products to start catching on, but they did, 0:13:57.000 --> 0:13:59.280 and there was a massive shift in how people started 0:13:59.280 --> 0:14:02.520 thinking about and it wouldn't be, honestly, I think until 0:14:02.720 --> 0:14:07.920 the early two thousands where most people started realizing, holy cats, 0:14:08.000 --> 0:14:12.239 these things really can change how we think about investing. 0:14:12.400 --> 0:14:14.920 He says. The same goes for him personally. He was 0:14:14.960 --> 0:14:17.800 on those original marketing teams for I Shares, but it 0:14:17.840 --> 0:14:20.320 wasn't until he actually used in e t F himself 0:14:20.760 --> 0:14:22.560 that he got it. I was not one of those 0:14:22.560 --> 0:14:24.920 guys that recognized greatness and jumped in. I'm not going 0:14:24.960 --> 0:14:27.640 to claim any of that. It wasn't until I was 0:14:27.720 --> 0:14:29.560 sitting on a trading desk, and all of a sudden, 0:14:29.560 --> 0:14:31.680 I could like hit a button and get a million 0:14:31.680 --> 0:14:38.520 dollar exposure to the cues. I was all in. Next 0:14:38.560 --> 0:14:41.400 time on Troyon's Presents, The E t F keeps getting 0:14:41.440 --> 0:14:44.760 bigger and bigger and bigger. It got to a billion 0:14:44.760 --> 0:14:47.040 dollars in three days. That's a record. As you know. 0:14:47.120 --> 0:14:50.240 It's that I called the Joe DiMaggio hitting Still the 0:14:50.280 --> 0:14:53.240 standing record easily, is it? You know what number two is? 0:14:53.280 --> 0:14:58.280 Can you guess? Bnd? Yeah, that's true nerd nerds him 0:14:58.320 --> 0:15:01.560 right there. Hardly anybody knows that. Thanks for listening to 0:15:01.560 --> 0:15:03.640 The E t F Story Until next time. You can 0:15:03.640 --> 0:15:08.119 find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, 0:15:08.600 --> 0:15:10.640 and wherever else you like to listen. The et F 0:15:10.720 --> 0:15:13.880 Story is produced by Jordan Bell, with some production help 0:15:14.080 --> 0:15:17.960 by Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcasts.