Speaker 1: Hey, this is Trillions presents the e t F Story.
Speaker 1: I'm Joel Weber and I'm the editor of Bloomberg Businessman.
Speaker 1: During the series, we've been tracing the story of the
Speaker 1: exchange traded fund from its origin in the SEC's market
Speaker 1: break report, to building its legal structure to finally bringing
Speaker 1: it to market. Today, it remains the largest GTF with
Speaker 1: two D seventy billion in assets. But when Spy first
Speaker 1: launched in let's just say, it didn't exactly take the
Speaker 1: world by storm. Gary Eisenric is a managing partner at
Speaker 1: fair Field Advisors. At the time of spies launch, he
Speaker 1: was a specialist at spear Leeds and Kellogg tasked with
Speaker 1: providing liquidity as the product's first market maker. A market
Speaker 1: maker is someone who matches buyers and sellers and then
Speaker 1: takes a small cut. On its first day, Spy traded
Speaker 1: about a million shares, and eisen Rick says there was
Speaker 1: a lot of fanfare. There was the big spider, and
Speaker 1: there's all the T shirts and the hats, and a
Speaker 1: lot of dignitaries and a lot of people because it
Speaker 1: was a new issue. And then they put up the
Speaker 1: first print. It was two hundred shares and they had
Speaker 1: it on the ticker tape. I've got a copy of it,
Speaker 1: and they had a few of those, and and so
Speaker 1: I have the initial thing, and then some initial orders happened,
Speaker 1: and then it just sat. Yep, it just sat. Then
Speaker 1: over the next six months that volume went down very
Speaker 1: rapidly to where it was trading eighteen thousand years a day.
Speaker 1: Eric Baltunas and E. T. F analysts with Bluemerican Intelligence
Speaker 1: and our resident historian, says it was disappointing, and rumors
Speaker 1: about whether Spy would live on became spread. So kind
Speaker 1: of had this big hype first day, and but then
Speaker 1: it kind of trailed off, and I don't know if
Speaker 1: they were looking to close it. I heard that, but
Speaker 1: I'm not sure if that's totally true that. In fact,
Speaker 1: I had a number of people say, Gary, are wasting
Speaker 1: your time. It's not gonna make it. But I really
Speaker 1: felt strongly that it was a good enough product. It
Speaker 1: was only twenty five basis points and to be able
Speaker 1: to go in and trade that intra day was great.
Speaker 1: So getting it adopted was the hard part. So how
Speaker 1: did they do it? How did Spy go from treating
Speaker 1: eighteen thousand shares a day to being the world's largest ETF.
Speaker 1: Gary Eisenrich was leading these guerilla marketing efforts. He said
Speaker 1: he was able to sell people on spiders structure, and
Speaker 1: when those people had success with it, they ended up
Speaker 1: telling others. Besides, if they have a good experience trading
Speaker 1: hunter shares, they're going to tell the guy that's going
Speaker 1: to trade ten thousand shares. And that's basically how Spiders
Speaker 1: was from word of mouth and and a cheap product,
Speaker 1: and and people that money managers that we didn't want
Speaker 1: to buy an expensive product that had an embedded hundred
Speaker 1: basis points. They wanted to have it at twenty five
Speaker 1: basis points. And it sort of had to be word
Speaker 1: of mouth because brokers had no incentive to sell Spy.
Speaker 1: So he hit the road with people from the American
Speaker 1: stock Angine or am X to talk about Spy and
Speaker 1: and it was a sale on the n X too.
Speaker 1: I mean, it didn't have the best reputation of that,
Speaker 1: you know, and I don't know that that was warranted
Speaker 1: at all. But I would go to people places and
Speaker 1: they say, I'm not trade on the annex. But to
Speaker 1: get that going, and after a while you would talk
Speaker 1: to people and say I will bake you with fair
Speaker 1: market and trade. So it caught on because people were
Speaker 1: happy with the experience, they were happy, they were happy
Speaker 1: with the return that they were getting. Eric says, people
Speaker 1: including Eisenrich, who are advocating for SPY early on were
Speaker 1: true believers in the product, and that got things moving.
Speaker 1: That's important because repetition, guerrilla marketing, that stuff matters. But
Speaker 1: then you need that plus some kind of an outside catalyst.
Speaker 1: And the outside catalyst was the nineties economy kicked in
Speaker 1: right around and that's just a good year to be
Speaker 1: offering SMP hundred exposure. So you had that outside catalyst
Speaker 1: mixed in with the guerrilla marketing at the bottom from
Speaker 1: true believers, and that's when you started to see the
Speaker 1: assets grow and then from there basically double disassets every
Speaker 1: year for the next whatever decade. Whether it's a happy
Speaker 1: accident or whether it was the hard work of the
Speaker 1: folks at the m X really getting everybody to play
Speaker 1: ball at the same time for their own enlightened self
Speaker 1: interest reasons, it wouldn't have ever worked. Dave Nodded, the
Speaker 1: long time managing director of et F dot Com, says
Speaker 1: there was skepticism lurking in the background. As Spy and
Speaker 1: others moved into the marketplace, the skepticism was around whether
Speaker 1: or not you would ever get both sides of the
Speaker 1: market to participate. And what I mean by that is
Speaker 1: you had to have institutions willing to buy these things,
Speaker 1: willing to buy Spy to get their SMP exposure. But
Speaker 1: at the same time you needed to have people willing
Speaker 1: to be market makers and authorized participants that would arbitrage
Speaker 1: out price discrepancies. And I will admit when I first
Speaker 1: started waiting into this, I was enormously skeptical that that
Speaker 1: second part would show up, because there is a real
Speaker 1: chicken in the egg problem. Right If you only end
Speaker 1: up with one institution that buys fifty million dollars of
Speaker 1: them and then they never trade again, then the second
Speaker 1: side that that ap and market maker side never comes online,
Speaker 1: and the whole thing is a failure. So once Spy
Speaker 1: kind of took off and other people thought to use
Speaker 1: this structure in and track other things, not just the
Speaker 1: SMP five hundred. So one of those things was international,
Speaker 1: and so they had a line of ets from Morgan
Speaker 1: Stanley that came out that were called Webbs, Bob Tole
Speaker 1: began working with Nate Most on this very project from
Speaker 1: Morgan Stanley. So Nate and I start formulating what became
Speaker 1: eventually the filing for WEBS. I have to work with
Speaker 1: Nate because he's so far advanced into thinking compared to
Speaker 1: anybody else at Morgan Stanley. Even so, it's probably October
Speaker 1: ninety three. We get back together right after the summer,
Speaker 1: and we're gonna take and create what we know from
Speaker 1: our commodities world is a receipt. We draft the prospectives,
Speaker 1: We worked with the lawyers from Solomon and Cromwell and
Speaker 1: Lo and Behold, we designed the filing that goes in
Speaker 1: its world equity benchmark shares hence webs. Toll says he
Speaker 1: was very strategic about presenting this new webs product. He
Speaker 1: and Nate Most carefully educated people about what the product
Speaker 1: would really look like. One of the things that was
Speaker 1: so paramount in our thought process was that we wanted
Speaker 1: e t S to be a no fail environment. Even
Speaker 1: though we were trading international securities and packaging them all up.
Speaker 1: We didn't want to fail. Long story short, Spy was
Speaker 1: always known as the Spiders even when M d y
Speaker 1: CA met. That was also sort of the spiders. That
Speaker 1: was just what they called them. So when they Morgan
Speaker 1: Stanley wanted to put out something that used this this structure,
Speaker 1: but they wanted to have it track international markets, you know,
Speaker 1: like Brazil and Mexico and that kind of thing, because
Speaker 1: traders like to trade the whole country at once and
Speaker 1: just pick a stock. When they came out with their
Speaker 1: idea for these international type ETFs, they didn't have They
Speaker 1: couldn't use Spider because that's the state street name. So
Speaker 1: they said, you got to come up with a different
Speaker 1: term so that there's no investor confusion. So the first
Speaker 1: use of the name Exchange Traded Funds is in the
Speaker 1: web perspectives because we had to create something different. And
Speaker 1: so that's what's interesting is that the acronym and the
Speaker 1: name wasn't really put out there until six years after
Speaker 1: bloom and most you know, actually filed for it. WEBBS
Speaker 1: was important because it coined the term exchange traded fund
Speaker 1: but it was also significant because WEBBS was driven by
Speaker 1: client demand, not a says. Unlike Spy, which was innovation driven,
Speaker 1: WEBBS was addressing specific demands. WEBBS was wells far ago
Speaker 1: of Brian Stanley realizing that there was this demand from
Speaker 1: a sophisticated, instance outional trading market that wanted exposure to
Speaker 1: international markets in a way that they couldn't get access.
Speaker 1: And the way the reason they couldn't get access was
Speaker 1: primarily a custody problem. Um, you know, back in those days,
Speaker 1: if you wanted to trade uh, you know Argentina, which
Speaker 1: I think was one of the very first in the
Speaker 1: first ones in the sleeve, you had to have a
Speaker 1: local desk that knew how to trade Argentina. You had
Speaker 1: to have a local bank that was going to custody
Speaker 1: those assets. Maybe you know, Bank of New York might
Speaker 1: have an affiliate relationship with somebody down there, but it
Speaker 1: was it was a pain in the neck to include
Speaker 1: Argentina in your international portfolio. And ms c I was
Speaker 1: really trying to build out where then Morgan Stanley was
Speaker 1: really trying to build out their international chops, if you will.
Speaker 1: And so what they did was solicit from their biggest
Speaker 1: clients where do you want to trade? And so you
Speaker 1: look at that list of the fifteen or sixteen initial
Speaker 1: webs products, it's a bizarre list. Also, this structure, although
Speaker 1: it followed the same rapper concept, spy didn't follow the
Speaker 1: same unit Investment trust or u I T structure. Well,
Speaker 1: the u I T structure is extremely restrictive, right and
Speaker 1: for the SMP five hundred, and makes a ton of
Speaker 1: sense because you're never gonna not own one of the
Speaker 1: five D stocks in the SMP five hundred. They're all liquid.
Speaker 1: Everybody obviously wants all that exposure. So instead WEBS used
Speaker 1: mutual funds because mutual funds were less limiting than a
Speaker 1: u I T. When working with international markets, when you
Speaker 1: talk about Argentina, it's a little bit different, and the
Speaker 1: custody issues in some of those countries were in the
Speaker 1: mid nineties still intractable. I mean, I literally remember a
Speaker 1: phone call in the mid nineties with our custodian bank
Speaker 1: in India at Wells Fargo Nico, who was talking about
Speaker 1: the fact that we had to dec a whole bunch
Speaker 1: of trades because the courier got hit by a truck
Speaker 1: and there and all of the trades were on a
Speaker 1: paper in a knapsack going between the brokerage and the
Speaker 1: custody shop. So like that's the kind of stuff we're
Speaker 1: dealing with. In that environment, you had to have some
Speaker 1: latitude again, not that you weren't managing an index fund.
Speaker 1: You were managing an index fund. But um, I think
Speaker 1: there's a misconception that managing an index fund means that
Speaker 1: you own precisely everything exactly when you're supposed to it exactly.
Speaker 1: They're a price and that's just not true unless you're
Speaker 1: a U I T, in which case you have to
Speaker 1: do it that way. Bob Tole says, the managing director
Speaker 1: at Morgan Stanley, didn't think et s would amount to anything,
Speaker 1: so he was happy to unload them. Eventually, Barkley's Global
Speaker 1: Investors bought webs from Morgan Stanley and it was a
Speaker 1: steal a dollar, if I remember correctly, a dollar. Yeah.
Speaker 1: I had to have four phone calls with Bob Diamond,
Speaker 1: who was the president of Barclays in London, who was
Speaker 1: ex Morgan Stanley and a friend of mine. And he
Speaker 1: calls me four times to say, you know, what are
Speaker 1: they trying to do to me? You know, what's where's
Speaker 1: the land mine? Right? And I'm going just by it?
Speaker 1: I said, he goes. I said, what do you want?
Speaker 1: As bark plays, he said, we don't have a retail
Speaker 1: footprint in the United States. The largest capital markets in
Speaker 1: the world, and nobody knows Barclays from IOTA right. B
Speaker 1: g I is named at But if you asked a
Speaker 1: person on the on the street who the heck Barclays
Speaker 1: bank was, they they look at you like, I don't know.
Speaker 1: So here was the golden opportunity for Barclays to develop
Speaker 1: a retail brand in the United States for a dollar
Speaker 1: and get paid for doing it. Webbs eventually became I
Speaker 1: Shares after the Barclay's acquisition, and Noddix says, this is
Speaker 1: when the brand really started to change. And one of
Speaker 1: the consultants working in that process was a guy named
Speaker 1: Lee Cranefis. He was a consultant as part of that process,
Speaker 1: working with Patty Dunn, who would later become the head
Speaker 1: of b G I. And you know, he, I think
Speaker 1: recognized even more than me or any of the people
Speaker 1: who were in the business at the time, that these
Speaker 1: products were actually a solution not just for those big institutions, uh,
Speaker 1: and not just for people who needed to equitize cash,
Speaker 1: but but they were products that could solve real long
Speaker 1: term asset allocation investment needs for clients. And was really
Speaker 1: the guy who pushed for the rebranding of those into
Speaker 1: what is inarguably a more retail brand, I Shares Toll
Speaker 1: says Lee Craned. This was lucky to be in the
Speaker 1: position he was in as I Shares became more retail focused.
Speaker 1: But he wasn't the only reason for its success. It
Speaker 1: was the money that the AMEX kept telling him to spend. Right,
Speaker 1: and so what's Lee do? He tries a couple of things.
Speaker 1: If you remember, at one point every bus stop in
Speaker 1: Lower Manhattan from n y U South had an EYE
Speaker 1: Shares sign on it, and people kept saying, what does
Speaker 1: I Shares? Right? Then they started sponsoring circus sole events
Speaker 1: and then they so they were targeting. In my opinion,
Speaker 1: League got the luck of the draw. The real brains
Speaker 1: who I think deserves tremendous amount of credit is Bruce Levine,
Speaker 1: Jim Polison, Craig Friedman. All of those guys saw the
Speaker 1: vision of how to convert basically an institutional money manager,
Speaker 1: which was the old Wells Fargo Investment Advisors, into a
Speaker 1: retail brand name. Today, I Shares, which is now owned
Speaker 1: by black Rock, is the largest et F brand not
Speaker 1: exaists when you step back and think about it. Spy
Speaker 1: paved the way for I shares. If Spy had come
Speaker 1: out and continued to fail and not gotten any traction,
Speaker 1: I don't think there would have been a lot of
Speaker 1: move to to push webbs forward. Even so, it's a
Speaker 1: little bit of a miracle to me that Webbs ever launched.
Speaker 1: It wasn't something that I recall at the time. There
Speaker 1: was a tremendous amount of management enthusiasm and excitement about
Speaker 1: it was seen as sort of a bit of a
Speaker 1: flyer that we were doing to service a bunch of
Speaker 1: very high end customers. Not says it took a while
Speaker 1: for these products to start catching on, but they did,
Speaker 1: and there was a massive shift in how people started
Speaker 1: thinking about and it wouldn't be, honestly, I think until
Speaker 1: the early two thousands where most people started realizing, holy cats,
Speaker 1: these things really can change how we think about investing.
Speaker 1: He says. The same goes for him personally. He was
Speaker 1: on those original marketing teams for I Shares, but it
Speaker 1: wasn't until he actually used in e t F himself
Speaker 1: that he got it. I was not one of those
Speaker 1: guys that recognized greatness and jumped in. I'm not going
Speaker 1: to claim any of that. It wasn't until I was
Speaker 1: sitting on a trading desk, and all of a sudden,
Speaker 1: I could like hit a button and get a million
Speaker 1: dollar exposure to the cues. I was all in. Next
Speaker 1: time on Troyon's Presents, The E t F keeps getting
Speaker 1: bigger and bigger and bigger. It got to a billion
Speaker 1: dollars in three days. That's a record. As you know.
Speaker 1: It's that I called the Joe DiMaggio hitting Still the
Speaker 1: standing record easily, is it? You know what number two is?
Speaker 1: Can you guess? Bnd? Yeah, that's true nerd nerds him
Speaker 1: right there. Hardly anybody knows that. Thanks for listening to
Speaker 1: The E t F Story Until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: and wherever else you like to listen. The et F
Speaker 1: Story is produced by Jordan Bell, with some production help
Speaker 1: by Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcasts.