The ETF Story 5: The Sleeper

world by storm. Gary Eisenrich is a managing partner at fair Field Advisors. At the time of spies launch, he was a specialist at spear Leeds and Kellogg, tasked with providing liquidity as the product's first market maker. A market maker is someone who matches buyers and sellers and then takes a small On its first day, Spy traded about a million shares, and eisen Rick says there was a

lot of fanfare. There was the big spider, and there's all the T shirts and the hats, and a lot of dignitaries and a lot of people because it was a new issue. And then they put up the first print. It was two hundred shares and they had it on the ticker tape. I've got a copy of it, and they had a few of those, and and so I have the initial thing, and then some initial orders happened,

and then it just sat. Yep, it just sat. Then over the next six months that volume went down very rapidly to where it was trading eighteen thousand years a day. Eric Baltunas and E. T. F analysts with Bloomerican Intelligence and our resident historian, says it was disappointing, and rumors about whether Spy would live on became spread. So kind of had this big hype first day, and but then it kind of trailed off. And I don't know if they were looking to close it. I heard that, but

I'm not sure if that's totally true that. In fact, I had a number of people say, and Gary, are wasting your time. It's not gonna make it. But I really felt strongly that it was a good enough product. It was only twenty five basis points, and to be able to go in and trade that into day was great. So getting it adopted was the hard part. So how did they do it? How did Spy go from treating eighteen thousand shares a day to being the world's largest ETF.

Gary Eisenrich was leading these guerilla marketing efforts. He said he was able to sell people on spiders structure, and when those people had success with it, they ended up telling others. Besides, if they have a good experience trading hunter of those shares, they're going to tell the guy

that's going to trade ten thousand shares. And that's basically how Spiders was from word of mouth and and a cheap product, and and people that money managers that we didn't want to buy an expensive product that had an embedded hundred basis points. They wanted to have it at twenty five basis points. And it sort of had to be word of mouth because brokers had no incentive to

sell Spy. So he hit the road with people from the American stock Age or am X to talk about Spy, and and it was a sale on the m X too. I mean, it didn't have the best reputation of that, you know, and I don't know that that was warranted at all. But I would go to people places and they say, I'm not trade on the antics, but to get that going, and after a while you would talk to people and say, I will make you with fair

market and trade. So it caught on because people were happy with the experience, they were happy, they were happy with the return that they were getting. Eric says, people including Eisenrich, who are advocating for SPY early on were true believers in the product, and that got things moving. That's important because repetition, guerrilla marketing, that stuff matters. But then you need that plus some kind of an outside catalyst.

And the outside catalyst was the nineties economy kicked in right around and that's just the good year to be offering SMP hundred exposure. So you had that outside catalyst mixed in with the guerrilla marketing at the bottom of from true believers, and that's when you started to see the assets grow and then from there basically double disassets

every year for the next whatever decade. Whether it's a happy accident or whether it was the hard work of the folks at the m X really getting everybody to play ball at the same time for their own enlightened self interest reasons, it wouldn't have ever worked. Dave Nodded, the long time managing director of et F dot Com, says there was skepticism lurking in the background. As Spy and others moved into the marketplace, the skepticism was around whether or not you would ever get both sides of

the market to participate. And what I mean by that is you had to have institutions willing to buy these things, willing to buy Spy to get their SMP exposure. But at the same time you needed to have people willing to be market makers and authorized participants that would arbitrage out price discrepancies. And I will admit when I first started waiting into this, I was enormously skeptical that that second part would show up, because there is a real

chicken in the egg problem. Right If you only end up with one institution that buys fifty million dollars of them and then they never trade again, then the second side that that ap and market maker side never comes online, and the whole thing is a failure. So once Spy kind of took off and other people thought to use this structure in and track other things, not just the

SMP five hundred. So one of those things was international, and so they had a line of ets from Morgan Stanley that came out that were called Webbs, Bob Tole began working with Nate Most on this very project from Morgan Stanley. So Nate and I start formulating what became eventually the filing for WEBS. I have to work with Nate because he's so far advanced into thinking compared to anybody else at Morgan Stanley. Even so, it's probably October

ninety three. We get back together right after the summer, and we're gonna take and create what we know from our commodities world is a receipt. We draft the prospectives, We worked with the lawyers from Solomon and Cromwell and Lo and Behold, we designed the filing that goes in its world equity benchmark shares hence webs. Toll says he was very strategic about presenting this new webs product. He and Nate Most carefully educated people about what the product

would really look like. One of the things that was so paramount in our thought process was that we wanted e t S to be a no fail environment. Even though we were trading international securities and packaging them all up. We didn't want to fail. Long story short, Spy was always known as the Spiders even when M d y CA met. That was also sort of the Spiders. That

was just what they called them. So when they Morgan Stanley wanted to put out something that used this this structure, but they wanted to have it track international markets, you know, like Brazil and Mexico and that kind of thing, because traders like to trade the whole country at once and not just pick a stock. When they came out with their idea for these international type ETFs, they didn't have They couldn't use Spider because that's the state street name.

So they said, you got to come up with a different term so that there's no investor confusion. So the first use of the name Exchange Traded Funds is in the web perspectives because we had to create something different. And so that's what's interesting is that the acronym and the name wasn't really put out there until six years after Bloom and most you know, actually filed for it.

WEBBS was important because it coined the term exchange traded fund but it was also significant because WEBBS was driven by client demand, not a says. Unlike Spy, which was innovation driven, WEBBS was addressing specific demands. WEBBS was wells far ago of Brian Stanley realizing that there was this demand from a sophisticated insta cousinal trading market that wanted exposure to international markets in a way that they couldn't get access. And the way the reason they couldn't get

access was primarily a custody problem. Um, you know, back in those days, if you wanted to trade uh, you know, Argentina, which I think was one of the very first in the first ones in the sleeve, you had to have a local desk that knew how to trade Argentina. You had to have a local bank that was going to custody those assets. Maybe you know, Bank of New York might have an affiliate relationship with somebody down there, but it was it was a pain in the neck to

include Argentina in your international portfolio. And m c I was really trying to build out where them Morgan Stanley was really trying to build out their international chops, if you will. And so what they did was solicit from their biggest clients where do you want to trade? And so you look at that list of the fifteen or sixteen initial webs products, it's a bizarre list. Also, this structure, although it followed the same rapper concept Spy didn't follow

the same unit investment trust or u I T structure. Well, the u I T structure is extremely restrictive, right, and for the SMP five hundred, and makes a ton of sense because you're never gonna not own one of the five d stocks in the SMP five hundred. They're all liquid.

Everybody obviously wants all that exposure. So instead, Webbs used mutual funds because mutual funds were less limiting than a u I T. When working with international markets, when you talk about Argentina, it's a little bit different, and the custody issues in some of those countries were in the

mid nineties still intractable. I mean, I literally remember a phone call in the mid nineties with our custodian bank in India at Wells Fargo, Nico, who was talking about the fact that we had to dec a whole bunch of trades because the courier got hit by a truck and there and all of the trades were on a paper in a knapsack going between the brokerage and the custody shop. So like that's the kind of stuff we're

dealing with. Oh, in that environment, you had to have some latitude again, not that you weren't managing an index fund. You were managing an index fund. But um, I think there's a misconception that managing an index fund means that you own precisely everything, exactly when you're supposed to it exactly. They're a price and that's just not true unless you're a U I T, in which case you have to

do it that way. Bob Tole says, the managing director at Morgan Stanley, didn't think et s would amount to anything, so he was happy to unload them. Eventually, Barkley's Global Investors bought webs from Morgan Stanley and it was a steal a dollar if I remember correctly, a dollar. Yeah. I had to have four phone calls with Bob Diamond, who was the president of Barclays in London, who was ex Morgan Stanley and a friend of mine. And he calls me four times to say, you know, what are

they trying to do to me? You know, what's where's the land mine? Right? And I'm going just by it, I said, he goes. I said, what do you want as bar plays? He said, we don't have a retail footprint in the United States. The largest capital markets in the world. And nobody knows Barclays from IOTA, right. B g I is named at But if you asked a person on the on the street who heck Barclays bank was they they look at you like, I don't know.

So here was the golden opportunity for Barclays to develop a retail brand in the United States for a dollar and get paid for doing it. Webbs eventually became I Shares after the Barclay's acquisition, and Noddix says, this is when the brand really started to change. And one of the consultants working in that process was a guy named

Lee crane Fis. He was a consultant as part of that process, working with Patty Dunn, who would later become the head of b G I. And you know, he, I think recognized even more than me or any of the people who were in the business at the time, that these products were actually a solution not just for those big institutions, uh, and not just for people who needed to equitize cash, but but they were products that could solve real long term asset allocation investment needs for clients.

And was really the guy who pushed for the rebranding of those into what is inarguably a more retail brand, I Shares. Tol says Lead craned, this was lucky to be in the position he was in as I Shares became more retail focused. But he wasn't the only reason for its success. It was the money that the AMEX kept telling him to spend. Right, and so what's Lead do? He tries a couple of things. If you remember, at one point every bus stop in Lower Manhattan from n y U South had an EYE Shares sign on it,

and people kept saying, what does I Shares? Right? Then they started sponsoring Circus sole events and then they so they were targeting. In my opinion, League got the luck of the draw. The real brains who I think deserves tremendous amount of credit is Bruce Levine, Jim Polison, Craig Friedman. All of those guys saw the vision of how to convert basically an institutional money manager, which was the old

Wells Fargo Investment Advisors, into a retail brand name. Today, I Shares, which is now owned by black Rock, is the largest et F brand not exasts. When you step back and think about it, Spy paid the way for I shares. If Spy had come out and continued to fail and not gotten any traction, I don't think there would have been a lot of move to to push webbs forward. Even so, it's a little bit of a miracle to me that Webbs ever launched. It wasn't something

that I recall at the time. There was a tremendous amount of management enthusiasm and excitement about it was seen as sort of a bit of a flyer that we were doing to service a bunch of very high end customers. Not says it took a while for these products to start catching on, but they did, and there was a massive shift in how people started thinking about and it wouldn't be, honestly, I think until the early two thousands where most people started realizing, holy cats, these things really

can change how we think about investing. He says. The same goes for him personally. He was on those original marketing teams for I Shares, but it wasn't until he actually used in e t F himself that he got it. I was not one of those guys that recognized greatness and jumped in. I'm not going to claim any of that. It wasn't until I was sitting on a trading desk, and all of a sudden, I could like hit a button and get a million dollar exposure to the cues.

I was all in. Next time on Troyon's Presents, The E t F keeps getting bigger and bigger and bigger. It got to a billion dollars in three days. That's a record. As you know. It's that I called the Joe DiMaggio hitting Still the standing record easily, is it? You know what number two is? Can you guess? Bnd? Yeah, that's true nerd nerds him right there. Hardly anybody knows that. Thanks for listening to The E t F Story Until

next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you like to listen. The E t F Story is produced by Jordan Bell, with some production help by Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcasts.