The fate of the largest listed index fund in the world rests on the health of a group of twenty.
Thanks to a quirk in the legal structure used to create the SPDR S&P 500 ETF Trust, known as SPY, more than $250 billion is based on the longevity of 11 ordinary children born between May 1990 and January 1993.
These kids are now carving out careers in public relations, restaurants and sales, spread across the country, from Boston and Philadelphia to Alabama and Utah. But none of the eight Bloomberg News spoke to were aware of their role in investing history.
“Today I heard about this for the first time,” said 27-year-old Alexander Most, who is about to start graduate school, studying education, politics and management. “Did it make me think about my mortality? Absolutely, in terms of projecting when this thing might end.
It all dates back to the arcane structure used to create SPY, America’s first ETF, in 1993. ETFs have exploded in popularity since then, providing a way to buy a basket of stocks and other securities that track the performance of an index or a commodity. , or esoteric niches such as lifestyle (passion for pets) and values (biofuels).
At first, the creation of the SPY fund – which tracks the S&P 500 stock index – as a unitary investment fund solved a practical problem. Not only was it an established legal structure, but it allowed the issuer to create fund units that resembled shares of a corporation. But as a result, it required a specified termination date. So, like many trusts, the fund was originally structured to expire in 25 years – in January 2018. It was later changed to peg the fund to the lives of individuals, which extended its own lifespan.
SPY as we know it will cease to exist on January 22, 2118, which is 20 years “after the death of the last surviving eleven people” – whichever comes first. The Structure does not provide such persons with a financial interest in SPY.
At least eight of the 11 people named in the SPY documents have a family connection to the American Stock Exchange, which structured the first ETF and was bought by NYSE Euronext in 2008. For example, Most – the graduate student – is the grandson of Nathan Most, one of the creators of SPY. State Street Corp. referred requests for comment on the end-of-fund management plans to the NYSE, which declined to comment.
Claire McGrath was an attorney in the options division of AMEX in the early 1990s. She remembers a call for baby names that could be used by the trust and offered her son, Kevin, and two nephews, Paul and Peter Pavelka.
“I had my son, and they asked me if I would mind if they used him,” McGrath said. “It’s interesting because it’s an obscure rule that trusts always have to deal with, but that’s okay. At the time, when we were creating these things, we had no idea they would become so spectacular.
Kevin now works in public relations in New York, while Paul and Peter are based in Philadelphia, tending the bar of a trendy restaurant and working for the city’s water utility respectively. Rian and John Imwalle, siblings based in Birmingham, Alabama, also found themselves on the list (their late step-grandmother, Marilyn, worked for the corporate communications team), as did Emily Weber, whose father, Cliff Weber, worked at AMEX and later NYSE for more than two decades.
Jay Baker, now head of capital markets at Exchange Traded Concepts, an ETF issuer, says he came up with his daughter’s name. “They needed names,” Baker said. “I think someone said, ‘Would you volunteer for your daughter?’ and of course she had no say — and that was fine with me. It was just part of the process.
One of the few people unrelated to AMEX mentioned in the SPY documents is Elizabeth Angel, an Atlanta-based engineer and daughter of Jim Angel, a renowned finance professor at Georgetown University.
SPY is not the only ETF set up in this way. Seven other funds were also created as mutual funds, according to data compiled by Bloomberg. And at least three of them have a human lifespan provision.
Of course, with the oldest of the “SPY 11” not yet 30 years old, anyone who invests or trades the ETF has some time to find an alternative. But it’s a quirky reminder of how the ETF industry began.
“I’m honored to be a part of it and the way we relate on this is I think pretty special,” said Emily Weber, 26, who works in corporate sales in New York. “I’m proud of how he got to this point. I’m happy for everyone who worked there.