A Tiny History Lesson
When you have your CEO join you for a fireside chat at the NYSE to commemorate the launch of your new ETFs, you usually don’t want the first question from the audience to create an awkward moment of silence, followed by nervous laughter. But in this case, I was sort of happy about it.
The paraphrased question was: “Seth—are you worried about ringing the closing bell on the 35th anniversary of Black Monday?”
The silence came—I think—from the fact that while most of us in this business are highly rational, analytical folks, we all have some small streak of superstition in us, and the markets have not exactly been kind this year. The laughter came when we all just realized how funny it was that the question was posed, and the surprise that a Black Monday anniversary had faded from our collective top-of-mind memory.
But there was a nice symmetry to us standing on the podium to celebrate an ETF launch on the 35th anniversary of Black Monday, as that particular crisis was the genesis of ETFs.
The Dow Jones Industrial Average fell 22.6% by market close on October 19, 1987. There were many underlying causes that led to the market drubbing that day—a bubble-like run-up in the first half of the year, a negative news cycle containing a larger-than-expected trade deficit in the US, and an ensuing fall in the value of the dollar. Markets around the globe were selling off, as investors lost confidence and raced for the exits. Sell-offs in some derivatives created program trades to kick off, which forced more selling, and the downward spiral continued.
Beyond the immediate moves the Fed had to make at the time to restore some stability following that Monday, several studies were initiated in the following weeks to see if there were any lessons to be learned from the sell-off, given the increasingly globalized nature of the markets. From these studies, we saw changes in the settlement cycles among stocks, options and futures, as well the introduction of circuit breakers (forced trading stops), all of which have continued to evolve over the last three decades.
From the US Securities and Exchange Commission’s (SEC’s) postmortem on the crash, a seed was planted that became the idea behind the modern ETF. Given fragmentation in the market that day, the SEC questioned whether it would be more efficient and create more liquidity if block trading around various parts of the market could be consolidated into a basket of securities. Some very smart folks at the American Stock Exchange read the report and began to plug away at a solution, incorporating aspects of the commodity markets on top of the basket concept, and coming up with the exchange-traded fund prototype. It took them (and partners at S&P and State Street) another six years to eventually get the product approved by regulators and listed for trading. For those interested in a deeper dive into the history, see this article from the US Fed on the crash, or this great read from Eric Balchunas at Bloomberg on the development of the first US ETF.
From Tiny Acorns, Mighty Oaks
We now have a $10 trillion ETF market that has weathered (and prospered through) each crisis, from tech bubbles to housing crashes to the global financial crisis, the flash crash, the taper tantrum and a pandemic. They have continued to take on a more regular presence in many portfolios because they have continued to deliver efficient access to the markets in a vehicle that is easily accessible and that helps to diffuse the potential market impact of any single investor.
I’ve been working on ETFs on and off now for over 20 years, and the product keeps getting better. We’re looking forward to taking some of AB’s best thinking on ways to solve client problems and packaging them into this flexible shell for investors around the globe.
By the way, the Dow and S&P closed up the afternoon AB rang the bell, so all ended well. I’m pretty sure that might have been due to the better-than-expected earnings reports from some big constituents in the indices, but my knocking on wood on the way to the exchange floor might also have been a factor. Who’s to say?
Noel Archard is Global Head of ETFs and Portfolio Solutions at AllianceBernstein.
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