About 30 years ago, a revolutionary investment product crept into the market: the exchange-traded fund. As it was introduced, a handful of experts, from Vanguard founder Jack Bogle to the CFOs of some of the world’s largest foundations, shied away. “We’re for long-term investors, not for short-term traders,” Bogle told Nathan Most, the inventor of the first US-based ETF. Bogle never warmed to ETFs. But over the ensuing decades, just about everybody else did, including Vanguard, after Bogle retired.
ETFs, essentially funds that trade like stocks, made it much easier and cheaper to own and trade big groups of stocks at once, on demand. Investors could diversify their exposure by buying entire baskets of securities—like one holding the stocks of every company in the S&P 500—without buying and selling the underlying individual securities. And they could avoid some tax consequences of those 500 individual transactions. To a retail investor, they look a lot like index mutual funds and have fueled a shift toward passive investing. But as they have evolved, some experts have begun to worry about how they’re affecting the world’s capital markets.
This year, the global market in exchange-traded funds hit $5.46 trillion, with more than $4 trillion of that in the US markets. The most widely traded stock in the world during some months is an ETF: the fund that tracks the S&P 500 called SPY. It’s run by State Street (the investment company that Most took his idea to). Some other popular ETFs now trade more often than most of the underlying stocks in their indexes, like Invesco’s QQQ, which has become a quick way to invest in tech stocks because it holds the top 100 stocks trading on the NASDAQ.