Why the ETF is Uniquely American and Ideally Capitalist 

A 30-year-old rule by the Securities and Exchange Commission succeeded in lowering barriers to entry for cheaper and more flexible investment options. In January, the American Stock Exchange celebrated the anniversary of a remarkable development in stock investing: Exchange Traded Funds (ETFs). The ETF offers an unparalleled form of flexible investing, offering low-risk, relatively cheap, and diversified baskets of stocks and other securities.

While ETFs are in some ways similar to their more widely secured counter-part, mutual funds, they are more versatile, allowing traders to purchase or sell them on a stock exchange, just like a regular stock. While mutual funds are broad-based and more popular than ETFs, they are much more limited in scope, since they are not traded on any exchange and can be transferred only once per day after the market closes. ETFs in many ways embody the ideal capitalistic approach for engaging in stock investing because they provide the most empowerment for investors to diversify their stock options and have streamlined access to track trends in capital development.

ETFs cater to the average American investor. The relative rates of affordability for purchasing certain ETFs in relation to mutual funds enable even members of the middle and working classes to wade into the realm of investing. For instance, according to the Investment Company Institute, the average expense ratio for index equity ETFs was 0.16% in 2021, which equates to $16 annually per $10,000 of investment funds, compared with 0.47% for equity mutual funds. This marks a steady decline for mutual fund prices over time, as equity mutual funds were at .50 % in 2020, which is a significant drop from its status of 1.04 % in 1996. So, while mutual funds have become increasingly more affordable, ETFs still offer much lower fee rates by comparison, which appeals more to investors seeking to be cost-effective.

Another contributing factor to ETFs as a capitalistic investment tool is that these funds have often outperformed mutual funds in the average rate of return on investments. One of the biggest rewards in investing is the ability to create and further generate wealth over time. Last year ETFs pulled in $600 billion in capital gains, while mutual funds lost $1 trillion. 

Moreover, ETFs are grounded in the diversification of assets. That offers investors the freedom to choose from an array of securities that cater to their unique interests and immediate needs.  “At the time, it was not a watershed moment, but it’s now hard to imagine investing without ETFs,” said Todd Rosenbluth, head of Research at VettaFi and investment expert. “A whole generation of investors only thinks about using ETFs to get diversified exposure. They’ve opened up markets that previously were harder to obtain access to.”

The first ETF was unveiled as part of the SPDR S&P 500 ETF Trust on the floor of the American Stock Exchange by McGraw Hill Chairman Harold McGraw III, American Stock Exchange Chairman James Jones, and State Street CEO Marshall Carter. SPDR S&P 500 tracks the benchmark U.S. stock index, revolutionizing the marketplace by enabling investors to purchase and sell hundreds of stocks by liberty of a single, publicly traded share for the first time in history. These securities provide pooled investment options that are capable of tracking any range of assets, while also revealing fluid changes in the price of its shares to reflect trades made throughout the day.

This is where the SEC comes in. The Commission issued its first major regulatory framework on governing ETF trading through the Rule 6c-11 (the ETF Rule). This rule was proposed by the Commission in September 2019 and approved in December 2019, serving as a means to modernize the existing 300 exemptive orders that the agency issued on approving new ETFs to operate based on the Investment Company Act of 1940 (the “Act”). Rule 6c-11 essentially overhauled these 300 orders that were issued since 1992 into one, simplified, more expedient rule that enables ETF sponsors to issue their products into the market at a quicker and more efficient rate. The rule creates a set of transparency standards that must be met by the ETF sponsors, and once the proposed ETFs satisfy certain operating standards contained within the Act of 1940, they are able to be issued on the market without the cost or delay associated with obtaining an exemptive order. 

Perhaps the most laudable highlight to the ETF Rule is its ability to “facilitate greater competition and innovation in the ETF marketplace by lowering barriers to entry”, according to the rule’s fact sheet. As covered earlier in this article, the ability to incentivize more robust competition in capital markets, while offering an innovative means of market participation among a host of investment options so as to reduces barriers to entry for new products, represents one of the primary benefits of capitalism. The ETF rule also serves as a shining example of how a government agency reversed a trend of over-proliferation by reducing hundreds of burdensome exempt orders that were prohibiting new ETFs from entry into the market into one efficient rule that facilitates a cost-effective, transparent approval process for new EFTs. The current Commissioners at the SEC would be wise to take note of these free market lessons as it pertains to the agency’s present considerations to regulate crypto-currency in the future.

Despite the many benefits of ETFs, most investors still choose mutual funds. When looking at the end-of-the-year performances in 2022, ETFs hauled in $6.5 trillion in assets, compared to $16.3 trillion carried by mutual funds. According to senior ETF analyst Sumit Roy, this is largely attributed to mutual funds maintaining a 70-year head start over EFTs, as 2024 will officially mark 100 years since the iteration of mutual funds in the investment world. But, Roy and other analysts have suggested that due to the growing pace of inflows in ETF funds and increasing outflows in mutual funds, it will only be a matter of time before the surge in ETF investments surpasses mutual funds.

For now, ETFs are on the rise and offer investors with a host of benefits not afforded to them in equity mutual funds. In 2022 there were 431 new ETF funds. Among these funds, half were active strategies, which accounted for 15% of total ETF flows last year and amounted to approximately $100 billion. This marked a record for active strategies as a whole, according to data reported from Morningstar. 

In-line with this sentiment, Vivek Ramaswamy, executive chair of Strive Asset Management, has launched two new ETFs that are designed to counter BlackRock’s ESG-focused ETF. Where BlackRock’s ETF prioritizes the pursuit of environmental, social, and governance goals that are unrelated to specific financial indicators, Ramaswamy’s ESG ETFs are specially designed to pursue capital gains on investments first and foremost, while placing ESG factors as secondary. These ETFs engage in a purely capitalist-centered approach when pooling investments in the market.

In an interview on CNBC’s ETF Edge, Ramaswamy argued, “our perspective is that U.S. energy companies should be focused on drilling on fracking, on doing whatever allows them to be most successful over the long run. Without regard to any other political, social or environmental agenda,” he added. “Leaving politics to the politicians.” One of Ramaswamy’s new ETFs, the Strive 500 ETF (STRV), tracks 500 of the biggest publicly traded companies in the U.S., and is designed to combat trends of “woke capital” in investing. Woke capitalism sees that asset managers continually abandon the sole interest for investing—capital gains—in favor of pursuing sustainable investing, even at the investor’s expense.

With the thirtieth anniversary of the ETF, investors should take note of the many benefits that this revolutionary investment tool has to offer. Many American entrepreneurs, including Ramaswamy, have taken advantage of the many capitalist-centered benefits that ETFs have to offer in relation to other fund options. Understanding how ETFs represent a capitalist approach to investing is a useful step toward managing a profitable portfolio. The SEC’s ETF rule should serve as a model for opening up the securities market to innovative new investment funds.