How A Creative Physicist Dreamed Up And Created The ETF (2024)

The American Stock Exchange had a problem in 1987 — and it wasn't just the stock market crash. Nate Most knew he was the guy to fix it, and the ETF inventor revolutionized the world of finance as a result.

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The Amex, the chronic underdog stock exchange, was in bad financial shape. Trading volume was anemic. And it was tough to get companies to list on the Amex amid competition from the New York Stock Exchange and Nasdaq. It would take a miracle to turn around its fortunes.

Enter Most. He was in his 70s at the time. And he had worked at the Amex creating new financial products. Most, a physicist and a Navy submarine specialist in World War II who later traded commodities, wasn't the type who waited for others to fix problems.

He took it upon himself to be the idea person, problem-solver and innovator-in-chief. His goal? Create something the Amex could trade so it could make more money. And his invention, the ETF, turned out to be arguably the most successful financial innovation in modern times.

Don't Wait To Get Asked To Help

Trying to boost revenue in existing lines of business, such as individual stock listings, would fail, he knew. "There had to be a better way than entertaining company executives only to see them list on Nasdaq anyway," Most told Institutional Investor prior to his death in 2004 at age 90.

Most targeted creating a new asset class with the potential to grow explosively. "I thought that (the Amex) ought to be looking for trading in different classes of securities not already trading on an exchange, rather than continuing to fight what was obviously a losing battle," Most wrote in the forward of "Exchange Traded Funds: An Insider's Guide to Buying the Market," published in 2000.

Most's problem-solving skills, personality and perseverance led to the invention of the exchange traded fund, or ETF. Most came up with a way to trade a basket of securities like the S&P 500 as easily as a stock. Just like a share of Tesla (TSLA), an ETF can be bought and sold during the day. In contrast, the price of a mutual fund is calculated at the end of each trading day.

Think Outside The Box Like The ETF Inventor

The ETF inventor's self-described way of thinking "outside the box" was the key to his success in launching the ETF business.

"Nate had a creative kind of playful mind," recalls Jim Wiandt, founder of ETF.com. "Nate's secret sauce? He was intellectually curious; he was always poking and prodding and always engaged. (And he had) this drive to experiment and tinker and play around."

It took about six years from the time Most began tinkering with this new financial product until the first ETF, the Standard & Poor's Depository Receipts, dubbed the SPDR (SPY), launched in 1993.

Today, $5.33 trillion is invested in U.S. ETFs, according to ETF.com. And SPY remains the most popular ETF by far, with $409 billion invested in it. No one envisioned the ETF structure designed by Most would apply to so many different asset classes. But today there are thousands of ETFs ranging from stocks to bonds and from commodities to currencies, not to mention cryptocurrencies and highly specialized themes.

Break Down Roadblocks

Obstacles blocked the multiyear journey to the SPDR, though. Regulatory roadblocks loomed the whole time. Most had to convince the Securities and Exchange Commission to approve his ETF structure. Attorneys at the Amex told him the SEC would never approve it. He refined the design of the ETF to make sure it worked. And there was uncertainty as to how the new ETF would perform — and if institutional investors would embrace it.

But Most kept pushing his idea. And he drove his own team and partners at firms like State Street Global Advisors to fine-tune the product and make it work better than anyone thought it would. "He was dogged, determined," Wiandt recalled.

"No" wasn't an answer for the ETF inventor, adds Jim Ross, the ex-chairman of Global SPDR who worked on the SPDR project as a junior member at State Street Global Advisors.

"We were told no by the SEC multiple times, that's not going to work," Ross recalled. "But Nate kept driving the team. 'We gotta make this work,' he kept saying. He wasn't taking no for an answer."

ETF Inventor: Take Strength From Doubters

Naysayers energized Most. One skeptic was Jack Bogle, the dogged Vanguard founder and champion of low-cost index funds. Bogle rebuffed Most's ETF idea early on. He said frequent trading would increase costs. Still, Most wanted to prove him wrong. And eventually did. Now Vanguard is a leading provider of ETFs.

"He did not give up," said Ross. "It was just a question of how to make it work from both the operational side and legal side."

Turn A Problem Into An Opportunity

The ETF inventor saw an opening for innovation. Mutual funds were thriving in the 1980s. But the fund business had hardly changed.

That's when the light bulb went off. "I see mutual funds booming, gaining market fast, without being able to be traded," Most recounted to Wiandt for his book. "I thought, well, why not?"

Most's problem-solving skill set was the factor that propelled his career, says attorney Kathleen Moriarty. She traveled to Hong Kong with Most when he was in his 80s to revive an ETF of Hong Kong stocks.

"He always regarded everything as a puzzle to be solved," said Moriarty, now senior counsel at New York law firm Chapman and Cutler. "He was always thinking. The wheels were always turning, almost like a child — the way children look at things and say, 'Why is it like that?' It was kind of like that for him."

To develop the structure for the ETF, Most tapped his knowledge of commodities. While working for the Pacific Commodities Exchange in the 1970s he mastered the concept of warehouse receipts, an approach that sparked his ETF idea.

Most explained his thought process in a June 2004 interview with MarketWatch: "I started thinking about a warehouse receipt holding the shares in the fund, which could then be divided up into pieces. You could reassemble the pieces and get back the stocks, but otherwise only the pieces would trade."

"He was an innovator," Ross said. "He knew he had the right idea. That was the key."

Make Your People Skills Count

The ETF inventor got things done in large part because he was able to connect with people. That personality trait improved his power of persuasion.

He forged connections with securities regulators, lawyers, Wall Street market makers and virtually everyone he met. "The human element," said Wiandt, was a big key to his success. "People loved him. You wanted him to succeed and root for him. So, I don't think it was hard to get people on his side. They would listen to him and be receptive. And that is the story of Nate."

Most never let his ego get in the way of his work or his relationships. "He was definitely a maverick," Wiandt said. "But he was so not about himself. Nate had no ego. It wasn't even about him." It was all about the ETF.

He also had the knack of knowing when to lead and when to just be another person on the project, adds Moriarty.

"He was not one to take the spotlight," the attorney said. "If he wanted to get something done and if it required him to be the leader, he was leader. If he were required to be the team player, he would be the team player."

ETF Inventor: If You Love Your Work, Why Retire?

Most worked right up to the end of his life. Retirement wasn't his thing. In his late 80s, he was still hopping on planes to build the future of ETFs. In his obituary, a writer noted that "Most's idea of 'retirement' at age 90 would have put most business travel schedules to shame."

His passion was his calling card.

"He really was alive when he was working," said Moriarty. Most "didn't regard it as working; he regarded it as exploring and adventure. And it was what made him tick."

ETF Inventor Nate Most's Keys:

• Inventor of the ETF structure, arguably the most important financial innovation of modern times. Created the first and still-largest ETF, the SPDR S&P 500 Trust.
• Overcame: Heavy regulatory scrutiny of a new financial structure plus heavy resistance from the entrenched mutual fund industry.
• Lesson: "I see mutual funds booming, gaining market fast, without being able to be traded. I thought, well, why not?"

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