3 ETF Myths And 4 Trading Tips From The Man Who Helped Launch SPY

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Why is SPDR S&P 500 ( SPY ), beloved of so many investors in exchange traded funds, like an Apple ( AAPL ) iPhone? In both cases, the teams who helped launch the products did not anticipate they would revolutionize an industry.

"When we designed SPY, we had no idea how flexible the ETF vehicle would turn out to be," Jim Ross, chairman of the global SPDR business at State Street Global Advisors, said Tuesday at the 10th annual Inside ETFs conference in Hollywood, Fla. "We could not have imagined all the innovative ways ETFs are being used today."

Ross, who was part of the team that launched SPY 24 years ago, made that point as he drew a parallel between the iPhone's impact on the technology industry and ETFs' transformation of the investment landscape.

As U.S. ETFs enter their 25th year, the ETF industry is cheering both the fact that this investment vehicle holds a total of more than $2 trillion in assets and that ETFs represent less than 5% of the investable market - meaning, there's still plenty of room to grow.

ETFs certainly continue to be on a hot growth streak. "ETF assets have roughly doubled every three years over the past decade," Ross said at a conference session titled "The ETF Revolution And What's Next For ETFs." He said that there is no reason why global ETF assets cannot cross $16 trillion by 2025 at the continued annual growth rate of 19%.

Driving demand for, and innovative use of, ETFs are a host of insurance companies, ETF strategists, sovereign wealth funds, wealth management firms and even mutual funds, he added.

But Ross also pointed out that risks tied to ETF investing include a persistent lack of understanding about these investment vehicles. In his afternoon address, he sought to debunk common myths about ETFs and offered some tips for trading ETFs.

Myth 1: "ETF liquidity (issues) could blow up the fixed-income market." Despite this common perception, ETFs comprise less than 1% of the total fixed-income market, Ross said. That makes it unlikely they will "blow up" an entire market.

In fact, Ross believes fixed-income ETFs can be more efficient than other fixed-income products, as assets in them have continued to increase to more than $400 billion today. And although the underlying fixed-income market can be opaque, fixed-income ETFs offer transparency in terms of trading costs and portfolio holdings, he added.

Myth 2: "ETFs gone wild." Referring to the belief that the proliferation of ETFs can harm investors, Ross said he believes ETF issuers like his own company are diligent about making sure new launches meet existing needs. Even a crudely constructed ETF, he added, displays the American value of "take an idea to market and test it out."

The lesson here, Ross said, is that "all ETF investors need to understand what they are buying, when they are buying."

Myth 3: "ETFs fail to track intrinsic value in volatile markets." According to Ross, ETFs have in some cases helped the process of price discovery in challenging markets.

"That happened on Aug. 24 (2015)," he said. "SPY traded efficiently throughout the day" despite the extreme volatility in the stock market that day.

Ross noted, too, that following that day's trading disruptions in some stocks and ETFs , an ETF industry coalition took action to harmonize exchange rules to address the issue.

The lesson here, Ross added, is to understand ETF trading basics:

1. If you don't have to trade in volatile markets, don't.

2. Don't trade near the market open. Volatility tends to be high as the markets price in the news.

3. Use limit orders. These are generally seen to have advantages over market orders in terms of price control and protection.

4. Reconsider the use of stop orders. As many ETF investors unhappily discovered on Aug. 24, stop orders become market orders once the price is hit. And they run the risk of selling for much below their intended price in serious market disruptions.

A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price. A limit order is an order to buy or sell a stock at a specified price or better.

Introducing Ross to the audience, Inside ETFs CEO Matt Hougan made note of Ross' leadership role in the industry for more than two decades.

"There's a reason everyone loves him," Hougan said. "He's the chairman of the ICI (Investment Company Institute) ETF committee. He does education everywhere he can."

The Inside ETFs conference concludes Wednesday.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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