The S&P 500 was originally created in 1957 and it only contained 233 stocks (results going back further than that have been recreated to reflect historical performance numbers).
The first index fund seeking to track the S&P 500 wasn’t created until the early-1970s when Wells Fargo put something together for pension funds to invest in.
The first index fund available to retail investors was created by Vanguard’s John Bogle in 1976. The first bond index fund didn’t come along until 1986.
A year later the stock market experienced its worst one-day crash in history, falling 22% on Black Monday on October 19, 1987.
Regulators wanted to understand what could have caused this to happen so the SEC put together an 840-page report with their findings. One of the conclusions was that portfolio insurance caused severe damage to market liquidity and amplified volatility and selling.
This report led a team from AMEX to search for a solution to this problem. What they came up with is a way to buy and sell a basket of securities that could potentially give traders and investors a better option to be able to provide and accept liquidity when these dislocations occur. In 1993, this idea became the world’s first exchange-traded fund or ETF as the SPDR S&P 500 ETF was born.
Fast forward to today and that original ETF now has nearly $230 billion in assets. The ETF industry as a whole has well over $3 trillion and continues to grow by leaps and bounds.
It has transformed how traders and investors buy, sell and access different securities, sectors, strategies and asset classes. ETFs have also brought costs down and given investors an efficient, tax-friendly investment vehicle. My guess it some day ETFs will overtake mutual funds in terms of assets and be the main investment structure for the majority of investors.
We’ve seen a great deal of innovation in the investment industry in recent years and decades. Strategies that were once uninvestable, cost-prohibitive or only available to a select number of investors are now available to the masses. It’s never been easier to put together a low-cost, globally diversified portfolio of different asset classes, strategies and investments in an efficient manner.
But these changes didn’t happen overnight.
People like Benjamin Graham, Paul Samuelson, and Burton Malkiel were talking about the need for index funds many years before the idea came to fruition. And the history I’ve shared here shows how many of these innovations are really a collection of ideas that have been built on the ideas that came before them.
This is actually how most innovations occur. In his excellent book, How We Got to Now, Steven Johnson discusses six innovations that shaped the modern world. The one that surprised me the most was glass.
It’s likely that glass was created millions of years ago when a comet struck the planet and created enough heat to create a chemical reaction that turned silicon dioxide into a liquid that would change into a solid as it cooled. Glass didn’t serve much of a purpose until another invention brought it to life. Johnson explains:
Johannes Gutenberg’s printing press created a surge in demand for spectacles, as the new practice of reading made Europeans across the continent suddenly realize that they were farsighted; the market demand for spectacles encouraged a growing number of people to produce and experiment with lenses, which led to the invention of the microscope, which shortly thereafter enabled us the perceive that our bodies were made up of cells.
The printing press made people realize they needed glasses to read better. Glasses led people to tinker with different lenses which led to the first microscope which set off a revolution in both science and medicine.
Breakthroughs also led to the use of glass fibers, which when combined with laser technology, created what came to be known as fiber-optics. And it turns out that fiber-optics are extremely efficient in sending electrical signals at a greater bandwidth. So in a way glass is one of the main materials used in powering the Internet around the globe through the use of fiber-optic cables.
The smartphone is also a little glass computer that we carry around in our pockets. Glass is used for our TV and computer screens. It helps us consume media, interact with friends and colleagues, and keeps us entertained.
All of these innovations were built on top of ideas and inventions that came before them. Johnson touches on this idea in his book:
And that’s because ideas are fundamentally networks of other ideas. We take the tools and metaphors and concepts and scientific understanding of our time, and we remix them into something new. But if you don’t have the right building blocks, you can’t make the breakthrough, however brilliant you might be.
For me, this same idea applies to reading, writing and learning, as well. Learning isn’t as much of an aha moment as it is a series of incremental improvements. I don’t really have a single book or person that has completely shaped my principles or the way I view the world. Instead, it’s been more of a slow build-up of ideas, wisdom, and lessons learned from a wide variety of sources that have added up over time to provide more value collectively than individually. Eventually, my biggest ideas and breakthroughs come from being able to link together a number of different lessons that I’ve learned over the years.
In this way learning is a form of compound interest. It builds up slowly at first until it eventually gains enough steam to turn into something worthwhile.
It seems the history of innovation works much in the same way. Innovation is the collective compound interest of human ingenuity.
How We Got to Now
Some Things That Haven’t Been Around Very Long
Check out my latest this week on Bloomberg:
Understanding the Trump Rally
Now here’s what I’ve been reading this week:
- Multiple points of view (Collaborative Fund)
- A look back at the last 200 years in the stock market (Base Hit Investing)
- Just do it (Jason Zweig)
- A little more can go a long way (Irrelevant Investor)
- Risk vs. uncertainty (Ariadne Advisors)
- “You don’t need a parachute to go skydiving. You need a parachute to go skydiving twice.” (Reformed Broker)
- Q&A with Wes Gray on momentum investing (Abnormal Returns)
- How much money should you give your children? (Humble Dollar)
- What the Battle of Gettysburg teaches us about portfolio management (A Teachable Moment)