Digital Wealth

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Copyright © 2016 by Simon Moore. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 9781119118466 (Hardcover)

ISBN 9781119118480 (ePDF)

ISBN 9781119118473 (ePub)

In 1989, three separate global events heralded a revolution in household investing, with the potential to save American households billions over the coming decades.

In 1989, researchers from Carnegie Mellon University’s ChipTest project joined forces with IBM. Their computer was renamed Deep Blue after a naming contest. This chess computer would ultimately defeat the world champion. The same principles of deep analysis and simulation across multiple scenarios are employed by investment algorithms. The technology that beat the world champion once required a room of computing power. Today, as a sign of the incredible improvements in processing power, that same software no longer requires its own room and can run on a basic consumer phone.

In May 1989, Index Participation Shares (IPS) began trading on the American and Philadelphia stock exchanges, an equity derivative attempting to match the returns of the Standard & Poor’s (S&P) 500.1 The Chicago Mercantile Exchange sued, and a decision by a Chicago Federal Court ultimately stopped the practice due to regulatory issues. But public interest in trading an entire stock market in the same way that you can trade a single stock was demonstrated in the brief period that this product traded.

The concept ultimately led to a similar fund being set up in Toronto to track the TSE-35 index the next year, which was again short lived, but this led to the first U.S. exchange-traded fund (ETF) four years later. These ETFs ultimately created a low-cost way to track all major liquid asset classes in a tax-efficient manner.

Number of ETFs over Time

Source: Investment Company Institute.

But the innovation was just as powerful in cost as in simplicity. At the turn of the millennium, the average mutual fund charged an expense ratio of 1.6 percent a year; now many ETFs have expense ratios of 0.1 percent or even lower. That represents a 93 percent decline in costs, often with other important benefits in ease of trading and tax efficiency, too.

And in 1989, Tim Beners Lee was in Switzerland pioneering the idea of hypertext to link different computers together. This was the early stages of the Internet. The Web has evolved in critical and unforeseen ways since then. This is the technology that enables investment advice to now be delivered online with tremendous efficiency. These benefits are shared with clients in the form of much lower cost and greater ease of access and implementation than with traditional investment practices.