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 Eisenrich 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 On its first day, Spy traded about
Speaker 1: a million shares, and eisen Rick says there was a
Speaker 1: lot of fanfare. There was the big spider, and there's
Speaker 1: all the T shirts and the hats, and a lot
Speaker 1: of dignitaries and a lot of people because it was
Speaker 1: a new issue. And then they put up the first print.
Speaker 1: It was two hundred shares and they had it on
Speaker 1: the ticker tape. I've got a copy of it, and
Speaker 1: they had a few of those, and and so I
Speaker 1: 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 Bloomerican 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, and Gary, are
Speaker 1: wasting your time. It's not gonna make it. But I
Speaker 1: really felt strongly that it was a good enough product.
Speaker 1: It was only twenty five basis points, and to be
Speaker 1: able to go in and trade that into 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 of those shares, they're going to tell the guy
Speaker 1: that's going to trade ten thousand shares. And that's basically
Speaker 1: how Spiders was from word of mouth and and a
Speaker 1: cheap product, and and people that money managers that we
Speaker 1: didn't want to buy an expensive product that had an
Speaker 1: embedded hundred basis points. They wanted to have it at
Speaker 1: twenty five basis points. And it sort of had to
Speaker 1: be word of mouth because brokers had no incentive to
Speaker 1: sell Spy. So he hit the road with people from
Speaker 1: the American stock Age or am X to talk about Spy,
Speaker 1: and and it was a sale on the m 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 antics, but to
Speaker 1: get that going, and after a while you would talk
Speaker 1: to people and say, I will make 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 the 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 of
Speaker 1: from true believers, and that's when you started to see
Speaker 1: the assets grow and then from there basically double disassets
Speaker 1: every year for the next whatever decade. Whether it's a
Speaker 1: happy accident or whether it was the hard work of
Speaker 1: the folks at the m X really getting everybody to
Speaker 1: play ball at the same time for their own enlightened
Speaker 1: self interest reasons, it wouldn't have ever worked. Dave Nodded,
Speaker 1: the long time managing director of et F dot Com,
Speaker 1: says there was skepticism lurking in the background. As Spy
Speaker 1: and others moved into the marketplace, the skepticism was around
Speaker 1: whether or not you would ever get both sides of
Speaker 1: the market to participate. And what I mean by that
Speaker 1: is 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: not just pick a stock. When they came out with
Speaker 1: their idea for these international type ETFs, they didn't have
Speaker 1: They couldn't use Spider because that's the state street name.
Speaker 1: So they said, you got to come up with a
Speaker 1: different term so that there's no investor confusion. So the
Speaker 1: first use of the name Exchange Traded Funds is in
Speaker 1: the web perspectives because we had to create something different.
Speaker 1: And so that's what's interesting is that the acronym and
Speaker 1: the name wasn't really put out there until six years
Speaker 1: after Bloom and most you know, actually filed for it.
Speaker 1: WEBBS was important because it coined the term exchange traded
Speaker 1: fund but it was also significant because WEBBS was driven
Speaker 1: by client demand, not a says. Unlike Spy, which was
Speaker 1: innovation driven, WEBBS was addressing specific demands. WEBBS was wells
Speaker 1: far ago of Brian Stanley realizing that there was this
Speaker 1: demand from a sophisticated insta cousinal trading market that wanted
Speaker 1: exposure to international markets in a way that they couldn't
Speaker 1: get access. And the way the reason they couldn't get
Speaker 1: access was primarily a custody problem. Um, you know, back
Speaker 1: in those days, if you wanted to trade uh, you know, Argentina,
Speaker 1: which I think was one of the very first in
Speaker 1: the first ones in the sleeve, you had to have
Speaker 1: a local desk that knew how to trade Argentina. You
Speaker 1: had to have a local bank that was going to
Speaker 1: custody those assets. Maybe you know, Bank of New York
Speaker 1: might have an affiliate relationship with somebody down there, but
Speaker 1: it was it was a pain in the neck to
Speaker 1: include Argentina in your international portfolio. And m c I
Speaker 1: was really trying to build out where them Morgan Stanley
Speaker 1: was really trying to build out their international chops, if
Speaker 1: you will. And so what they did was solicit from
Speaker 1: their biggest clients where do you want to trade? And
Speaker 1: so you look at that list of the fifteen or
Speaker 1: sixteen initial webs products, it's a bizarre list. Also, this structure,
Speaker 1: although it followed the same rapper concept Spy didn't follow
Speaker 1: the 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, Webbs 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. Oh, in that environment, you had to have
Speaker 1: some 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 bar 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 heck Barclays bank
Speaker 1: 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 crane Fis. He was a consultant as part of
Speaker 1: that process, working with Patty Dunn, who would later become
Speaker 1: the head of b G I. And you know, he,
Speaker 1: I think recognized even more than me or any of
Speaker 1: the people who were in the business at the time,
Speaker 1: that these products were actually a solution not just for
Speaker 1: those big institutions, uh, and not just for people who
Speaker 1: needed to equitize cash, but but they were products that
Speaker 1: could solve real long term asset allocation investment needs for clients.
Speaker 1: And was really the guy who pushed for the rebranding
Speaker 1: of those into what is inarguably a more retail brand,
Speaker 1: I Shares. Tol says Lead craned, this was lucky to
Speaker 1: be in the position he was in as I Shares
Speaker 1: became more retail focused. But he wasn't the only reason
Speaker 1: for its success. It was the money that the AMEX
Speaker 1: kept telling him to spend. Right, and so what's Lead do?
Speaker 1: He tries a couple of things. If you remember, at
Speaker 1: one point every bus stop in Lower Manhattan from n
Speaker 1: y U South had an EYE Shares sign on it,
Speaker 1: and people kept saying, what does I Shares? Right? Then
Speaker 1: they started sponsoring Circus sole events and then they so
Speaker 1: they were targeting. In my opinion, League got the luck
Speaker 1: of the draw. The real brains who I think deserves
Speaker 1: tremendous amount of credit is Bruce Levine, Jim Polison, Craig Friedman.
Speaker 1: All of those guys saw the vision of how to
Speaker 1: convert basically an institutional money manager, which was the old
Speaker 1: Wells Fargo Investment Advisors, into a retail brand name. Today,
Speaker 1: I Shares, which is now owned by black Rock, is
Speaker 1: the largest et F brand not exasts. When you step
Speaker 1: back and think about it, Spy paid the way for
Speaker 1: I shares. If Spy had come out and continued to
Speaker 1: fail and not gotten any traction, I don't think there
Speaker 1: would have been a lot of move to to push
Speaker 1: webbs forward. Even so, it's a little bit of a
Speaker 1: miracle to me that Webbs ever launched. It wasn't something
Speaker 1: that I recall at the time. There was a tremendous
Speaker 1: amount of management enthusiasm and excitement about it was seen
Speaker 1: as sort of a bit of a flyer that we
Speaker 1: were doing to service a bunch of very high end customers.
Speaker 1: Not says it took a while for these products to
Speaker 1: start catching on, but they did, and there was a
Speaker 1: massive shift in how people started thinking about and it
Speaker 1: wouldn't be, honestly, I think until the early two thousands
Speaker 1: where most people started realizing, holy cats, these things really
Speaker 1: can change how we think about investing. He says. The
Speaker 1: same goes for him personally. He was on those original
Speaker 1: marketing teams for I Shares, but it wasn't until he
Speaker 1: actually used in e t F himself that he got it.
Speaker 1: I was not one of those guys that recognized greatness
Speaker 1: and jumped in. I'm not going to claim any of that.
Speaker 1: It wasn't until I was sitting on a trading desk,
Speaker 1: and all of a sudden, I could like hit a
Speaker 1: button and get a million dollar exposure to the cues.
Speaker 1: I was all in. Next time on Troyon's Presents, The
Speaker 1: E t F keeps getting bigger and bigger and bigger.
Speaker 1: It got to a billion dollars in three days. That's
Speaker 1: a record. As you know. It's that I called the
Speaker 1: Joe DiMaggio hitting Still the standing record easily, is it?
Speaker 1: You know what number two is? Can you guess? Bnd? Yeah,
Speaker 1: that's true nerd nerds him right there. Hardly anybody knows that.
Speaker 1: Thanks for listening to The E t F Story Until
Speaker 1: next time. You can find us on the Bloomberg Terminal,
Speaker 1: Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you
Speaker 1: like to listen. The E t F Story is produced
Speaker 1: by Jordan Bell, with some production help by Magnus Hendrickson.
Speaker 1: Francesca Levy is the head of Bloomberg Podcasts.