The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

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DrCheese
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The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by DrCheese » Sun Aug 11, 2019 7:24 pm

Very interesting article on the ETF SPY.

The fate of the world’s largest exchange-traded fund rests on the health of a group of twenty-somethings.

Thanks to a quirk in the legal structure used to set up the SPDR S&P 500 ETF Trust, known as SPY, more than $250 billion rests on the longevity of 11 ordinary kids born between May 1990 and January 1993.

https://www.bloomberg.com/news/articles ... ket-newtab

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by ResearchMed » Sun Aug 11, 2019 8:20 pm

DrCheese wrote:
Sun Aug 11, 2019 7:24 pm
Very interesting article on the ETF SPY.

The fate of the world’s largest exchange-traded fund rests on the health of a group of twenty-somethings.

Thanks to a quirk in the legal structure used to set up the SPDR S&P 500 ETF Trust, known as SPY, more than $250 billion rests on the longevity of 11 ordinary kids born between May 1990 and January 1993.

https://www.bloomberg.com/news/articles ... ket-newtab
Never heard of this before.
Any idea how they decided on "11" named persons?

Although it's quite a ways off, presumably, what happens to SPY as the end date approaches (or arrives)?
There are apparently a few other funds based upon life-expectancies like this. Are any of likely shorter duration?

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by nisiprius » Sun Aug 11, 2019 8:21 pm

Oh, my! What a splendid setup for a murder mystery.

Adjust the facts just a bit. In the story, the kids do not know they are mentioned in the structure of the corporation. By 2060 their parents are dead or have forgotten. Few of the managers of the trust would need to know about this. I wonder if their lawyers review it all regularly to see how many of the eleven are still alive? Maybe someone has just set an alarm in Google Calendar to remind them in 2070, and Google Calendar gets discontinued when Google is acquired by Novaya Zemlya Qubit Systems (because the world economy is shifting toward the poles).

So in the story, the eleven are being mysteriously killed, one by one. Murders are usually solved by looking for a motive, and none of the kids or their friends or family have any idea why they are being killed. They are apparently motiveless murders, and seemingly completely unconnected.

Of course, I don't know who would benefit from from SPY coming to an untimely end. The managers of competing S&P 500 ETFs, like IVV and VOO?

And the title possibilities! "The Mystery of the Murdered SPY."
Last edited by nisiprius on Sun Aug 11, 2019 8:29 pm, edited 3 times in total.
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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by ResearchMed » Sun Aug 11, 2019 8:25 pm

nisiprius wrote:
Sun Aug 11, 2019 8:21 pm
Oh, my! What a splendid setup for a murder mystery.

Adjust the facts just a bit. In the story, the kids do not know they are mentioned in the structure of the corporation. By 2060 their parents are dead or have forgotten. Few of the managers of the trust would need to know about this. I wonder if their lawyers review it all regularly to see how many of the eleven are still alive? Maybe someone has just set an alarm in Google Calendar to remind them in 2070, and Google Calendar gets discontinued Google is acquired by Novaya Zemlya Qubit Systems (because the economy is shifting toward the poles due to global warming).

So in the story, the eleven kids are being mysteriously killed, one by one, except that nobody understands the pattern because nobody knows they are part of a set. Murders are usually solved by looking for a motive, and none of the kids know why they are being killed. Apparently motiveless murders, with no apparent connection between them.

Of course, I don't know who would benefit from from SPY coming to an untimely end. The managers of competing S&P 500 ETFs, like IVV and VOO?

And the title possibilities! "The Mystery of the Murdered SPY," "The Ghost who Yelled VOO."
Instead of "The Wrong Box" (tontine based), it could be called "The Wrong SPY" or such :twisted:

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by columbia » Sun Aug 11, 2019 8:26 pm

Yet another reason to stick with mutual funds.

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by AlohaJoe » Sun Aug 11, 2019 8:31 pm

nisiprius wrote:
Sun Aug 11, 2019 8:21 pm
Adjust the facts just a bit. In the story, the kids do not know they are mentioned in the structure of the corporation.
That's what actually happened. From the subheadline: "Most of those named in the document were not aware."
“Today was the first I heard about this,” said Alexander Most, 27, who’s about to start graduate school, studying education, policy and management. “Has it made me think about my mortality? Absolutely, in terms of projecting when this thing might end.”
ResearchMed wrote:
Sun Aug 11, 2019 8:20 pm
Any idea how they decided on "11" named persons?
From the article, "Claire McGrath was a lawyer in the options division of the AMEX in the early nineties. She remembers a call going out for babies’ names that could be used by the trust and volunteered her son, Kevin, and two nephews, Paul and Peter Pavelka."
Although it's quite a ways off, presumably, what happens to SPY as the end date approaches (or arrives)?
When it arrives, the trust is dissolved and assets handed back to whoever is invested in the trust at that point.

In reality, it will almost certainly be a non-event. They will spin up a new SPY2 and most assets will move over without any issues. Remember you have a 20-year head's up notice. Retail investors with taxable holdings would have 2 decades to draw it down -- similar to Roth conversions or RMDs, presumably they'd do it in tax-aware ways.
New SPY investors would be put into SPY II, and SPY I would be put into runoff mode. Active traders would sell their SPY I and buy SPY II; they’d have to pay taxes on their own gains, but they’d be doing that on active trading anyway, and the actual SPY trusts wouldn’t incur any taxes because of the in-kind creation and redemption mechanism that is at the heart of the ETF industry’s actual magic. Nor would anyone necessarily have to sell any of the underlying stock, again due to the in-kind ETF mechanism; money could move from SPY I to SPY II by passing a basket of S&P 500 stocks from SPY I to a bank trading desk, and from that trading desk to SPY II, without ever selling it in the market. The natural ETF arbitrage mechanism would tend to buy up shares of SPY I and transform them into shares of SPY II.

So the assets of SPY I would pretty efficiently move over to SPY II, and the price of the underlying stocks would not be affected. Some retail investors wouldn’t want to move, because the move would trigger taxable gains for them, but over 20 years that problem would mostly go away as they cash out naturally.[3] By 2039, the trust’s accelerated end date, SPY I would be pretty small and the real S&P 500 index ETF action would be in SPY II. No one would have to dump stock along the way

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by arcticpineapplecorp. » Sun Aug 11, 2019 8:36 pm

very interesting, thanks for sharing. sounds like much ado about nothing because they have to disolve the fund within 20 years after the death of the last 11 or 2118 whichever comes first. There's plenty of time to establish Spyy, Spy2, etc. and move remaining funds over to the new version of the ETF and new monies go to the new fund. Nothing to freak out about. Will be a very orderly transition over a 20 year period. No sudden disruption to occur.
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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by ResearchMed » Sun Aug 11, 2019 8:37 pm

AlohaJoe wrote:
Sun Aug 11, 2019 8:31 pm
nisiprius wrote:
Sun Aug 11, 2019 8:21 pm
Adjust the facts just a bit. In the story, the kids do not know they are mentioned in the structure of the corporation.
<snip>
ResearchMed wrote:
Sun Aug 11, 2019 8:20 pm
Any idea how they decided on "11" named persons?
From the article, "Claire McGrath was a lawyer in the options division of the AMEX in the early nineties. She remembers a call going out for babies’ names that could be used by the trust and volunteered her son, Kevin, and two nephews, Paul and Peter Pavelka."

<snip>
Yes, I read that. Where did it mention how/why the number of "11" was the number to be used?

Why not "10" or an even dozen, or even a larger number, to minimize some weird small-group effect/event (even though they don't know each other, they weren't selected randomly), etc.?

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by LadyGeek » Sun Aug 11, 2019 8:43 pm

Old news, as we discussed this two years ago. See: SPY is a Unit Investment Trust (Jun 01, 2017)
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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by AlohaJoe » Sun Aug 11, 2019 8:44 pm

ResearchMed wrote:
Sun Aug 11, 2019 8:37 pm
Yes, I read that. Where did it mention how/why the number of "11" was the number to be used?

Why not "10" or an even dozen, or even a larger number
Ah, yeah, I see what you mean. Dunno. Maybe state law limits them to 11?

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by ResearchMed » Sun Aug 11, 2019 8:52 pm

AlohaJoe wrote:
Sun Aug 11, 2019 8:44 pm
ResearchMed wrote:
Sun Aug 11, 2019 8:37 pm
Yes, I read that. Where did it mention how/why the number of "11" was the number to be used?

Why not "10" or an even dozen, or even a larger number
Ah, yeah, I see what you mean. Dunno. Maybe state law limits them to 11?
Yup, that must be it! :D

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by LadyGeek » Sun Aug 11, 2019 8:53 pm

The trust falls under NY state law. Here's the agreement: SPDR® S&P 500® ETF TRUST, search for "2118".

All Unit Investment Trusts must have a termination date. See: Unit Investment Trusts (UIT): An Introduction | ETF Database

Actually, there are a total of eight UITs. Details are in the ETF Database article.

The wiki has some background info. See: Unit investment trusts (termination dates are discussed)
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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by illumination » Sun Aug 11, 2019 9:33 pm

I'm sort of confused, if you technically held SPY past the date it terminates, does that mean the fund liquidates and you would then have a taxable event? Can someone "screw this up" so to speak where they don't move things over?


One would think since ETFs have become such a mainstream way to invest, they would simply amend some trust laws that made more sense for this sort of investment vehicle. It's obviously nothing in the immediate future, but when some of these come "due" it could mean people make poor decisions because they "heard" their ETF was being dissolved.

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Re: The Fate of the World’s Largest ETF Is Tied to 11 Random Millennials

Post by jeffyscott » Tue Aug 13, 2019 7:47 am

illumination wrote:
Sun Aug 11, 2019 9:33 pm
I'm sort of confused, if you technically held SPY past the date it terminates, does that mean the fund liquidates and you would then have a taxable event?
I don't know, but I would think maybe the shares of stock would be distributed and you would then directly own ~500 different stocks?


Unrelated to that, the people involved in creating SPY selected the individuals that are named, so they were not randomly selected as the sensationalistic headline seemed to imply to me. Made me go read it to see if one of my kids had won this mysterious lottery. So not really random and the "fate" of SPY is not really tied to them in any way that will ever matter. Nice job by the headline writer for Bloomberg getting people to click an article, though.
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