Lou Maiuri: Jim, welcome, thank you for joining us today.
Jim Ross: Lou, it’s great to be here. I'm excited for this.
Lou Maiuri: It's truly a pleasure to have you here today, Jim, given your history within State Street, your career path, which includes so many monumental roles across State Street, and of course, you are known as the father of ETFs. Are there any moments of specific years that come back over the past three decades that stand out for you.
Jim Ross: I think of the first decade, it was really proof of concept. And the other question was simply, would the structure work? And the more important question was: would investors care? And the short answer is, it worked. And by the end of the decade, I would say investors were starting to care. We started to see more competition coming into the space, looking at the structure and saying, hey, hold on, this might be something that we can take on and really grow our businesses with. So when we get to the second decade, talking two very large themes in the second decade. There was product innovation and explosion of ETF uses by financial advice. Product innovation just simply means we went from a US equity product to international equity, international fixed income, gold, commodities, and a whole bunch of different things and a lot of different uses. And then when I think about when we get back to kind of the financial advisor adoption of ETFs, it was incredible. They saw this as a way to transition their book from the old days of brokerage accounts and charging their clients commissions to transitioning them to fee-based accounts. And really, the ETF really became a growth vehicle because it fits so well into those fee-based accounts. Allowed for diversification and lower costs and really allowed the financial advisors, some who were not welcoming of ETF five years before, to really adopt ETFs and say this is a path forward for my client and it's much better outcome. When I get to the third decade, Lou, I guess I would call it the third decade, honestly, the kitchen sink decade. There was a lot. There was significant adoption of ETFs by institutional investors, which is relatively new, including insurance companies, pension funds, endowments, asset managers, all sorts of adoptions for all different kinds of outcomes. And I think the second thing when I think about the kids in sync is just continuing product innovation, including what we're seeing more recently, active ETFs, thematic ETFs, future-based ETFs and just continuing to expand some ETFs globally, and continued significant growth of ETF assets globally. Just the adoption has been crazy. And really a lot of innovation of the ETFs has come from the users trying to use them to find specific outcomes for their clients. I know insurance companies that had very little interest in ETFs 10 years ago, now use them as a liquidity buffer for their general account fixed income portfolios. Very very unique approach specific to their world.
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Text: The birth of ETFs
Lou Maiuri: So when you go back 30 years ago, which is a long time, and the launch of Spy, did you ever once believe this could be a $10 trillion global market?
Jim Ross: I mean, the short answer is no. And I honestly still can't believe it. About five years in, we saw some potential signs. In 1998, Merrill Lynch and the American Stock Exchange came to State Street and said, we wanna launch something called the Sector SPDRs. Well, that was the first time we worked with an investment bank who wanted to put ETFs into retail accounts in their system. That was unique. It was around then I started to feel much more comfortable that the product structure worked and I saw potential growth. From a personal career perspective, I made a choice at the end of 1999 to switch to a role in SSGA, which was a 100 per cent a bet on ETFs. It was a three-person team that may or may not work, and my boss at the time and many colleagues thought I was, I'll be kind, just crazy. Looking back, it worked out okay.
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Text: Early ETF adoption
Lou Maiuri: Was there ever a time that you were worried that the ETF vehicle just may not gain some traction and may not be as accepted?
Jim Ross: Yes, 1994. So Spy had a good first year, got up to, and my number's gonna be not perfect in this 30 years ago loop, but like $450 million in assets. 1994 was in net outflows. It was down in assets, and we were just concerned that the adoption might not happen. Those early years were challenging. We weren't sure. Luckily, after 1994, it just started to grow and frankly, it doubled for the next four years, every year. That's when you started feeling a little bit better about it.
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Text: The impact of ETFs
Lou Maiuri: So, when you reflect upon the impact that ETFs have had in the industry, asset management, you talked a little bit about insurance and the widespread use of it. Like, what are you the most proud of when you sit there as the father of the vehicle?
Jim Ross: So I think of a lot of things, but I can break it down to three. One thing, because I was a product geek on this thing, I'll be honest with you, that was my job in the beginning. So just the resiliency of the product structure itself. It has been tested numerous times now. Probably the earliest test might have been September 11th, we got through a global financial crisis, something called the flash crash happened to us. There was a global pandemic and every time the resiliency of the product structure worked, investors were able to deploy capital through ETFs and get a reasonable spread on their investment and from a product guy perspective, that's all I could ask for. The second one, I guess it delivers better on investment outcomes, but delivers a potential for better outcomes because it delivers an outcome at a much lower cost to the end investor. I mean, think about it, over three decades, trading commissions and spreads have compressed from quarters and 50 cents to zero, basically. And ETF expense ratios never were high and now are significantly lower. That is all a benefit to the end investor and the outcomes they can deliver, whether it's their financial advisor, they're doing it on their own, or any ETF investor. And the third one, and this one I just always say is simple, jobs, lots of jobs. A lot of ETF people in the world today. There weren't a lot of ETF people in 1993.
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Text: The inspiration behind ETFs
Lou Maiuri: We know what an ETF is, but why? Why did you create it? I mean, innovation is born out of conflict and need. What was the catalyst? What was the driver that inspired you to come up with this idea?
Jim Ross: So I'm going to be very transparent here, Lou, in two different ways. One, the idea came to State Street by the American Stock Exchange and they had a new product at the time, a gentleman by name Nate Most, who at the time was 73 years old. He came up with this idea. It was born out of the financial crisis in 1987. So the crash of 1987, the SEC did a study on it and said ‘hey, we think one of the root causes was portfolio insurance didn't work. And we need something that will work in a crisis, go work on it.’ The American Stock Exchange came up with this concept, which was a fully collateralized basket of stocks. That's what we have. But it could trade in the exchange so it could actually, it had the ability to go up and down with demand, and not go to premiums and discounts like we saw in the close-end fund vote. And that was the key to this. That was the key because that was the thing that didn't work in that if everybody needs to unload a billion dollars of spy today, they can do that, but they can do that probably on the bid today. But back then it was a lot more difficult.
Lou Maiuri: You make it sound simple, but it's a hugely impactful innovation, obviously.
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Text: The next big thing in ETFs
Lou Maiuri: So when you look around corners, what's the next biggest thing in ETFs?
Jim Ross: I've never had a crystal ball in this industry and I don't today. I'm sure something will be very innovative and one thing I know to be successful in the ETF space, it has to help the investors achieve their goals. I am amazed by some of the things I've seen over the years. Some innovations we've been involved in but also some innovations that I've just seen happen in the marketplace. I don't know what the next thing is. It's going to be interesting to watch.
Lou Maiuri: Jim, thank you for your time, sharing all your thoughts, your expertise. Thank you for creating the ETF. I think all of us could tell you that it's made an impact on all of our lives and our families. So thank you so much for your time, Jim. Great to see you again.
Jim Ross: No, thanks for inviting me back for this. We really appreciate it. Lots of fun.
