SPY: A game-changer
Happy birthday, SPY! This week, the SPDR S&P 500 ETF (NYSEMKT:SPY) celebrated its 20th anniversary, which makes it the granddaddy of exchange-traded funds. SPY is also the 800-pound gorilla in this ecosystem: From $6.5 million in assets at its launch, it has ballooned to $128.5 billion -- an incredible 64% annualized growth rate over two decades. With an expense ratio of just 0.1%, it's no wonder that it has become so popular. (But in this context, I can't go without mentioning its rival, the Vanguard S&P 500 ETF, with an expense ratio half of SPY's -- a stunning 0.05%.)
Low-cost index mutual funds existed prior to ETFs, but the fact that the latter trade like stocks has broadened their appeal and given them higher visibility -- a very positive development in an industry in which most "active" fund managers are incapable of consistently beating their benchmarks. Still, there's no stopping the ingenuity of the fund management industry when it comes to clawing higher fees from investors. According to McKinsey, the next hyper-growth phase in the ETF sector will belong to actively managed ETFs. The consulting firm is predicting that this segment will increase from $10 billion today to $500 billion by 2020.
In this area, as in many others, investors are best served by keeping things simple. There are numerous exchange-traded products today that are clearly unsuitable for individual investors -- witness the "2 times" and "3 times" products that promise leveraged index returns. The great lesson of SPY is that a straightforward strategy and ultra-low cost are a tough combination to beat, regardless of (or perhaps because of) the amount of effort and ingenuity put forth by those who try.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.