A brief history of ETFs
How a physicist, warehouse receipt and near-death experience gave birth to the most disruptive investment innovation of the modern era.
The story of ETFs begins, as so many innovations do, with a catastrophe.
On 19 October 1987, the Dow Jones Industrial Average fell 23% in a single session – which remains the worst day in the history of the American stock market.[1] Traders stood on the floor of the New York Stock Exchange watching numbers that refused to make sense. Portfolio insurance, designed to protect institutions from exactly this kind of collapse, failed spectacularly.[2] The futures and equity markets had come apart at the seams, and nobody had a tool nimble enough to stitch them back together.
Black Monday, as it came to be known, did two things. First, it terrified Wall Street. Second, it planted the seed of an idea that would eventually grow into a $20 trillion industry.[3]
The man from the warehouse
Nathan Most was not your typical financier. He had trained as a physicist at UCLA, served as a submarine engineer for the US Navy during the Second World War and spent much of his subsequent career as a commodities trader – first at Pacific Vegetable Oil, then as president of the Pacific Commodities Exchange. He understood grain silos and oil drums and the elegant mechanics of physical markets. He arrived at the American Stock Exchange (AMEX) in 1976, joining its product development team. By that point, he was in his early sixties.
Most had been turning an idea over in his mind even before the crash. But the SEC’s 800-page post-mortem on Black Monday (a document not known for its inspirational qualities) clarified his thinking.[4] Buried deep in that report was a suggestion: what the market needed was a single security capable of representing the entire market, the way S&P 500 futures contracts did in the derivatives world. It needed a basket, and a receipt.
That last word was the spark.
In commodities, as Most knew, you store goods in a warehouse and receive a certificate in return. And that certificate can be traded. You never have to physically move the soybean or the barrel of oil; the receipt does the work.
Why couldn’t the same logic apply to a basket of equities? You deposit the stocks with a custodian, receive a share in return and then trade that share on an exchange. In many ways, this concept is no different to any other contract in that you trade at a price that reflects the underlying basket in real time.
Working with his AMEX colleague Steven Bloom, and guided by lawyer Kathleen Moriarty, Most filed the concept with the SEC in 1989. That same year, the Berlin Wall fell, Nintendo Game Boy launched and the Dow closed at 2,753.
Nobody noticed.
Four years in purgatory
Presented with something genuinely new, the SEC did what regulators often do with genuinely new things: it sat on the filing (for four years).
The problem was structural. Most’s product didn’t fit cleanly into any existing legal category. It wasn’t a mutual fund, because it traded on an exchange. It wasn’t a stock, because it represented a basket. And it wasn’t a futures contract, although a rival product (the Index Participation Share) was ruled to be one by a federal court in Chicago, which promptly killed it. Even the concept of buying into a fund with stock rather than cash, which was central to the product’s tax efficiency and arbitrage mechanism, required the National Securities Clearing Corporation to build entirely new systems from scratch.
While Washington wrestled with the paperwork, Canada moved first. In 1990, the Toronto 35 Index Participation Units began trading on the Toronto Stock Exchange. So, the world’s first exchange-traded fund, by most definitions, launched three years before Americans had one.
Back in the US, the back-and-forth between the AMEX team and the SEC dragged on. By the time the product was finally approved, it had been four years – long enough for the cultural backdrop to shift entirely. When Most filed in 1988, George Michael’s Faith was the number-one song in America. By the time SPY launched, Nirvana and grunge had buried pop.
The Spider walks
On 22 January 1993, a group of financial executives rang the opening bell at the American Stock Exchange. Hanging from AMEX’s ceiling at 86 Trinity Place, a nine-foot inflatable spider swayed gently in the air-conditioning. The product was called the Standard & Poor’s Depositary Receipts – SPDRs, pronounced “Spiders” – and it tracked the S&P 500 Index. Its ticker was SPY.
One million shares traded on the first day. The expense ratio was 0.20 percent, a level set to match the leading index funds of the day. State Street Global Advisors acted as custodian, playing the role of Most’s virtual warehouse.
Then, barely anything happened.
By mid-June 1993, daily volume had dwindled to 18,000 shares. Over the following two years, assets under management fell from $461 million in 1994 to $419 million in 1995.[5]
The product was genuinely revolutionary; the problem was the distribution model – or rather, the lack of one. Unlike mutual funds, SPY paid no sales commission to brokers. For retail investors, this was an enormous advantage. But with no incentive to sell it, nobody did.
What saved SPY was true believers.
A market maker named Gary Eisenreich, whose job was to provide liquidity for the new product, became one of its most passionate evangelists. Word spread slowly, organically, person to person, in the manner of any product that works but doesn’t have a conventional sales force behind it. And then the 1990s bull market arrived in earnest. By 1998, SPY had gained 160% and held $12 billion in assets.[6]
The rest, as they say, is history.
The great expansion
Once SPY had established that the concept worked, the industry moved to test how far it could stretch.
The first expansion came in late 1998, with the launch of the Sector SPDRs. This was a set of nine products that sliced the S&P 500 into its constituent industries: technology, energy, financials, healthcare and so on. For investors who wanted broad exposure to, say, the technology sector without picking individual stocks, it was revelatory. The ETF was no longer just an index tracker. It was a precision instrument.
International equity ETFs followed, giving investors in New York or Chicago direct access to Japanese, German, British and Hong Kong markets without wiring money abroad or navigating foreign brokerages. Then, in 2002, came bond ETFs – a development that, in retrospect, looks almost more significant than the original equity launch. iShares rolled out four fixed-income products covering Treasury bonds and investment grade corporate debt. The idea that you could trade a bond portfolio like a stock (i.e., intraday, at transparent prices, with fees lower than mutual funds) was not obvious in 2002. It is now fundamental to how institutional investors manage liquidity.
The first gold ETF arrived in 2004, offering investors direct exposure to physical bullion without needing to store it themselves. GLD, launched by State Street, eventually became one of the world’s most traded securities. Two years later came the first exchange-traded notes – debt instruments linked to commodity indices. This extended the ETF’s structural ingenuity into yet another corner of the market.
Perhaps the most philosophically charged moment came in 2008, when the SEC approved the first actively managed ETFs.
This was the industry crossing a conceptual Rubicon. The original promise of the ETF had been pure and simple: cheap, passive, index-tracking exposure. Active management – with its higher fees, less-transparent holdings and reliance on fund manager skill – seemed to pull in the opposite direction. And yet the wrapper was so clearly superior, in terms of tax efficiency, liquidity and cost of distribution, that it was only a matter of time before active managers adopted it.
Although the marriage was complicated, it turned out to be durable.
The trillion-dollar animal
The ETF industry crossed $1 trillion in assets in late 2010, a milestone that had once seemed implausible for a product that had nearly failed in its first year. By 2019, US-listed ETFs held $4 trillion. By the end of 2022, despite a brutal year for financial markets, global ETF assets stood at $6.5 trillion. Today, the number exceeds $20 trillion, globally.[7]
There are now more than 5,000 ETFs available to US investors[8], covering equities, fixed income, commodities, real estate, currencies, volatility, thematic sectors, factor exposures, crypto, private credit and even single-stock leveraged bets. In many markets, ETFs have become the default setting of a generation of investors.
John Bogle, whose Vanguard pioneered the index fund in 1976 and who famously turned down Nathan Most when he first came to pitch the idea, remained ambivalent about ETFs to the end of his life.
His concern was not the structure but the behaviour it enabled: the ability to trade the market all day long invited speculation, which undermined the long-term, low-cost philosophy he had spent his career promoting. He was right, in a narrow sense. ETFs can be traded like stocks, and many people trade them badly. But Bogle’s broader insight about the benefits of cheap, diversified, passive exposures is now embedded in the DNA of the product he chose not to back.
The warehouse, revisited
Nathan Most died in December 2004, at the age of 90. He had lived long enough to see SPY grow into a behemoth, and long enough to predict with reasonable accuracy what would come next – i.e., active ETFs, commodity ETFs, a global expansion of the wrapper to every asset class imaginable.
“The ETF structure can be used for almost anything,” he said in one of his last interviews. “As long as the underlying product has liquidity of trading, you could trade almost anything in this structure.”[9]
It turned out, he was right about nearly everything.
The story of ETFs is, at its core, a story about a simple idea applied with great persistence. The idea that you could warehouse a basket of assets and issue a tradeable receipt proved more durable, more expansive and more democratising than almost anyone predicted. It survived regulatory limbo, near-commercial death, the scepticism of one of the industry’s most celebrated figures and 30 years of competition that never quite managed to produce anything better.
The spider on AMEX’s ceiling in January 1993 was a joke, a piece of marketing theatre for a product nobody was sure would survive the year. Today, SPY manages more than $500 billion. The warehouse is enormous now. And the receipts are everywhere.
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[1] Stock market crash of 1987, Federal Reserve History
[2] Ibid
[3] ETFGI reports record US$21.24 Trillion in Global ETF Assets, ETFGI, March 2026
[4] October Recollections: The future of US securities markets, David S. Ruder, Securities & Exchange Commission, October 20, 1988.
[5] Bloomberg/Eric Balchunas & Joel Weber, The ETF Story podcast series.
[6] Ibid
[7] ETFGI reports record US$21.24 Trillion in Global ETF Assets, ETFGI, March 2026
[8] ETF Industry KPIs, Tidal Financial Group, 23 March 2026.
[9] Happy 20th Birthday, ETFs: A Look Back at Nate Most and his novel idea, Institutional Investor, 2013.