Editor's Note:This interview is part of a "SPY@20" series of
pieces IndexUniverse is rolling out to commemorate the 20
anniversary of the first U.S.-listed ETF. The package will include
a number of interviews with industry sources as well as blogs from
IndexUniverse senior executives. The stories that have run so far
include the following:
- SPY@20:First ETF Changed Investing
- SPY@20: S&P 500 & Indexing, The Perfect Mix
- SPY@20:You've Come A Long Way Baby
Kathleen Moriarty, a partner at the New York-based law firm
Katten Muchin Rosenman LLP, was there at the very beginning of
the exchange-traded fund industry. Moriarty helped Nate Most
draft the regulatory paperwork that would make his brainchild,
the SPDR S&P 500 ETF (NYSEArca:SPY), a reality.
Twenty years later, Moriarty wears with pride and a sense of
humor the nickname "SPDR Woman" that she earned during that
seminal experience. The fact that SPY now has nearly $130 billion
in assets only adds to her sense of wonder about it all. But her
surprise at its vast success and her gratitude about being part
of history is also accompanied by a sense of optimism about what
the future holds for the ETF world spawned by SPY.
Let me look at my cheat sheet here and I'll tell you,
just in case you hadn't thought about it lately, how much money
is in SPY right now on its 20
anniversary:$127 billion. So, what say you, Kathleen
I can tell you for a fact that when we launched it we were hoping
to get $1 billion. We didn't think that was ridiculous. Of course
we hoped for more, but we thought $1 billion would be a realistic
number in 1993.
Why did you choose to ask for approval of this particular
unit investment trust legal structure as opposed to the full
open-end one like competing S&P 500
, say the iShares S&P Core ETF (NYSEArca:IVV) or the Vanguard
S&P 500 ETF (NYSEArca:VOO), different funds that can reinvest
It was because it was conceived of for a completely different
purpose. In other words, Nate did not have a securities background.
He was a commodities person. And when he was thinking about this,
he did talk to John Bogle about it, and Bogle said:"It will be a
disaster because of all the intraday stuff and the way they manage
your portfolios. It would just be a complete disaster. You would be
selling in and out with horrible tax consequences." So Nate went
back to the drawing board.
Moriarty (cont'd.): So he didn't go back to the concept of the
mutual fund at all. He started thinking about commodities and,
depending on the commodity, you immobilize a commodity in a
warehouse and you don't actually trade the stuff, you trade the
receipts for the stuff. So what people do instead of trading bales
of cotton is they trade certificates for bales of cotton, and
they're negotiable. So if I own a certificate for 100 bales of
cotton and I want to sell it, you want to buy it, and I sell it to
you and you buy it, and then the cotton is yours. And if you want
to go in and get the cotton you can go and get the cotton. It's
your expense. You have to go pick it up, but those bales of cotton
are yours. That's what that certificate entitles you to.
So he thought, "Why not effectively immobilize the security?"
because what he and institutions viewed the S&P 500 as was that
they were trading a basket. They weren't trading a mutual fund.
Nobody wanted to personally manage anything. They wanted the 500
stocks, and then if they changed they wanted the changed basket of
the 500; that's all. They didn't want any reinvestment. They didn't
want any board directors. They didn't want any anything. They
wanted to make it like cotton, except instead of cotton, it would
be little boxes of the 500 stocks.
Are you saying that it was not designed whatsoever as a
No I wasn't saying that, but Nate's goal was to create a new
product that would trade on the Amex. The most important thing was
it had to trade, because the Amex had lost a lot of market share
and it wanted to increase market share by having a new product that
would be available there and that would trade heavily. That's where
the revenue would come from. So they weren't interested in having a
big management fee, and they weren't interested in managing it,
because that's not where they were looking to get the money. They
were looking to get the money from the trading.
So, that original perspective is really a commodities
perspective. That was why it was always so interesting to me that a
commodities person ended up inventing something that became a
IU:From a regulatory perspective, was the unit investment
trust an easier thing to get through the SEC than an open-end
Actually, it's hard to say. Using an open-end fund as a basis is
often easier than a unit trust, because the vast majority of funds
in America are open-end funds, and so they have the most rules,
they have the most history.
In a unit trust, we don't have anything like that, so sometimes
the SEC is less likely to grant exemptions to a unit trust, because
they don't, there was no "there" there. Now in this case, because
we were doing something ultimately fairly simple in terms of the
portfolio, the SEC agreed we didn't need to have a board, and so it
turned out not to be a problem for us, because nothing that we
wanted to do really mattered whether we had a board or we didn't
have a board. So in our particular case, the commission was pretty
You were looking for the simplest structure that could
accommodate an unmanaged portfolio, and that was the unit
Absolutely. And actually we thought about dividend reinvestment at
the time and we didn't put it in originally because, again, Nate
said, "People who own the S&P 500 aren't looking for dividend
reinvestment necessarily. They're looking at the basket, and if
they keep it long enough to get dividends, that's fine, but they
may not, so that isn't a critical structural feature."
Then about six months after we launched, people started saying,
"Why can't we reinvest?"
Reinvest dividends, you mean?
Right. So we adopted a dividend reinvestment plan. Now, we couldn't
adopt an internal reinvestment plan the way open-end funds do,
because we weren't permitted to do that since we were not a managed
fund, and that is considered to be managing.
So it's inaccurate to say that you can't reinvest
dividends in SPY? It's just the legal mechanism that affords that
possibility that is different than in an open-end fund; is that
what you're saying?
the case, but then later-this is fairly recent-the SEC decided that
SPDRs and SPDR Dow Jones Industrial Average Trust (NYSEArca:DIA)
and the SPDR S&P MidCap 400 ETF (NYSEArca:MDY)couldn't have a
reinvestment program even though we did have one, so that had to be
But there is certainly no question that you can, if you're
adding your 401(k) or something and you get dividends, you can then
ask your broker-dealer to reinvest those dividends in more shares
that are purchased on the open market. You just can't do it as
efficiently as you can if it was its own dividend reinvestment
What sort of insights, apart from surprise, do you cull
from this extraordinary experience of being part of a team that
helped start what is now one the biggest portfolios in the
It comes back to Nate:He said "Let's keep it simple." He really
wanted it to just do what it was supposed to do and not have a
thousand bells and whistles that would make it look cooler or more
interesting but maybe get in the way or maybe make things
complicated or maybe cost more. His view was very much that people
want to invest in these stocks, and they don't want to pay a lot
for it and they don't want to do a lot with them. They either want
to sell them or buy them or hold them. And let's just stick to the
vision of doing something as simple as we can.
ETF assets are now at $1.417 trillion, near an all-time
record-suffice it to say this juggernaut is still gathering
steam. Is there anything about how this whole thing is unfolding
that gives you pause, or are you pretty excited about the
I think I'm pretty much of the latter. But also I think-and I think
this is true for securities in general, not just ETFs-as the
various safety nets continue to be chiseled away and corporations
continue to chisel away at defined benefit programs, individuals
are going to be more and more responsible for their own retirement
planning. And I think there is really going to have to be an
incredible crank-up in investor education because people just have
to know more than they know now to really invest properly.
Is the ETF industry well suited to rise to that
I think the ETF industry is largely prepared to rise to that
The one concern that I have is about the totally nontransparent
active ETF. If the transparency goes away, I think there probably
is some way you can figure out another mechanism that will make
sure that the NAV is close to market price. But what people forget
about the ETF was we would have never gotten that approval if we
couldn't have more or less convinced the commission that the ETF
was going to sell its shares in the open market roughly at the same
price as NAV. Without that assurance, the commission never would
have adopted it, because the whole core of the '40 Act is to permit
everybody to get NAV.
IU:Do you get the feeling, having pretty deep experience
working with the SEC, that it's prepared to fully deal with all
the traffic as it relates to ETFs? Are there any adjustments at
the commission that relate to ETFs that you would like to see in
place that relate to ETFs in particular?
The fact that recently the division of Investment Management has
lifted the moratorium on the regular use of derivatives by ETFs is
a good sign.
The commission is in a state of flux now anyway, so it's hard to
say. The active ETF is really a very big thing. I think it's a
bigger step than the
active ETF, for a number of reasons. And I think the commission is
going to have to have a lot of time and a fair amount of energy and
willpower to get that done if that's what they want to do.
And when you say "active" in this context, you're talking
about the disclosure of portfolio holdings four times a year with
the lag period, as opposed to the disclosure every evening like
the quasi-active ETFs that now are on the market?
Exactly. To me a real active ETF is like a mutual fund.
Do you think that the truly active ETF will be welcomed
from a regulatory perspective, or do you think that that is an
I think it's an open question.
You keep circling back to Nate, and I realize he is truly
the father of the SPY and of the ETF in the United States. But
are there any other people that you think of as often?
You mean in terms of the ETF's startup?
Yes, at the genesis of the whole thing.
Oh yes. What I always like to tell people is that one of the most
fun things about working on SPDRs was that there were a number of
different institutions and they were all cooperating with each
other. No one was paying anybody else's way. Everybody chipped in
pretty much, and everybody just did it for the product.
So, the stars were aligning:State Street Global Advisors
and people like Jim Ross, Nate at the Amex and so on? For an
exquisite period of time, a lot of the internecine warfare of
Wall Street was suspended.
Why then? Why those parties?
Nate wanted to make sure that he got the right people, so when we
did MidCap SPDRs, he used Bank of New York, because he wanted to
use a different trustee to see how the competition would go. And
then for the Diamonds, he went back to State Street. I believe he
was inclined to use people like State Street and Bank of New York
because he wanted
kind of people, so he didn't want some strange little bank or
whatever. He wanted really old-line kind of players.
So what was the feel of it, overall?
This was pre-Internet, so we all had phone conversations, we had
conference calls, and more importantly, we had face-to-face
meetings all the time. It was very, very personal.
IU:So was that pre-Internet context laughably inefficient
or super high-touch?
It was very efficient, because unlike the Internet, you didn't have
people remotely in different places half paying attention and
shooting off emails before they knew what they were doing or
agreeing to something before they had really read something. And
they were all sitting in a room and they all had to focus, and you
could tell immediately if somebody was not paying attention. And we
would all arrive at a decision and because we were all there, and
we would all sign off, so it was very, very efficient.
IU:So this worked in SPY's favor?
Yes-you got to know people, you got to know how they think. You
could see their reactions before they even spoke. It was very
engaging, we met a lot and we knew really each other. It was a
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