3 ms·

ETFs may be new, and it may be fairly recent that index funds took over >50% of market share, but index funds themselves aren't exactly new. Funny side mention

by dmoy 3y ago

ETFs may be new, and it may be fairly recent that index funds took over >50% of market share, but index funds themselves aren't exactly new. Funny side mention - some of the oldest ETFs are very strange legally, because they didn't yet know how to create them properly. SPY for example is tied to the lifespan of a bunch of not-quite-random people

pests 3y ago
> SPY for example is tied to the lifespan of a bunch of not-quite-random people Can you go into this more?
- dmoy 3y ago
  Yea sure Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it. What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry. Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515346966/d88674dfwp.htm https://www.sec.gov/Archives/edgar/data/1222333/000119312515... (Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.
  - dmoy 3y ago
    In other words, it is expertly crafted tech (legal) debt to the tune of $500 billion dollars
  - pests 3y ago
    Oh thanks. I love this stuff! Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? "The option must be exercised before the end of the period ending 21 years after the death of the last survivor of all the lineal descendants of his Majesty King Charles III who have been born before the date of this agreement."
    - dmoy 3y ago
      > Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Yea that's the problem with unit investment trusts. > Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? I can hazard a guess - it was cheap for them to make an amendment to change from 25 yrs to named-person+20, and it would have been expensive for them to figure out how to do a dynasty thing. So they kicked the can probably 90 years down the road for cheap. Newer ETFs, from what I gather, don't have this problem at all. So presumably the "real" fix down the road will be to restructure in the proper legal entity, not a UIT.

by dmoy 3y ago

pests 3y ago

> SPY for example is tied to the lifespan of a bunch of not-quite-random people Can you go into this more?

dmoy 3y ago
Yea sure Basically when they made SPY it was such a new ETF (it was the first US ETF) that they didn't have a lot of good legal precedent to go with / copy, so they were kinda winging it. What they did know was Unit Investment Trusts, so that's what they did. Initially they set it for 25 years, but quickly realized that was not a great idea, so they amended the trust agreement to have named people (sort of beneficiaries, except they get $0, so only legally). So they literally went around to associated people (lawyers working with the trust, etc), asked if anyone had babies (no, really), and then named those babies or little tiny toddlers in the trust. There were like a dozen of them, and if they all die, then SPY expires 25 years later or something. So SPY is dependent on the lifespan of a dozen-ish people whose parents or parents' friends are associated tangentially with the finance industry. Here's an article from the SEC which mentions it in passing: https://www.sec.gov/Archives/edgar/data/1222333/000119312515346966/d88674dfwp.htm https://www.sec.gov/Archives/edgar/data/1222333/000119312515... (Now, back in the real world, this is definitely something that "doesn't really matter". SPY is so big and so important that this is a Thing That Will Be Fixed when (not if) it becomes a problem. So it's momentarily funny, and it's gonna cause some lawyers a lot of headache and cursing their ancestors in like 50-70-90 years from now, but people will move heaven and earth (congress, courts, etc) to amend SPY before it actually dissolves.
- dmoy 3y ago
  In other words, it is expertly crafted tech (legal) debt to the tune of $500 billion dollars
- pests 3y ago
  Oh thanks. I love this stuff! Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? "The option must be exercised before the end of the period ending 21 years after the death of the last survivor of all the lineal descendants of his Majesty King Charles III who have been born before the date of this agreement."
  - dmoy 3y ago
    > Immediately sounds like its related to / because of the rule against perpetuities? Which then makes sense AFAIK (IANAL) for them to pick peoples babies, as funny as that sounds. Yea that's the problem with unit investment trusts. > Reading on Wikipedia - why wasn't something like the Kennedy / royal lives clause used? I can hazard a guess - it was cheap for them to make an amendment to change from 25 yrs to named-person+20, and it would have been expensive for them to figure out how to do a dynasty thing. So they kicked the can probably 90 years down the road for cheap. Newer ETFs, from what I gather, don't have this problem at all. So presumably the "real" fix down the road will be to restructure in the proper legal entity, not a UIT.