ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing

CHAPTER 2

ETF History Lesson

How a New Type of Fund Was Born

 

The history of the exchange-traded fund begins with the stock market crash of 1987.

On October 19, 1987, better known as Black Monday, the Dow Jones Industrial Average plummeted 508 points, or 22.61 percent, to 1,738.74. With a loss of $500 billion in assets, it was the largest one-day crash in U.S. stock market history.

 

While Black Monday was the biggest stock market crash in the U.S., it was only the second largest one-day percentage drop in the Dow Jones Industrial Average. Nor did that occur in the Stock Market Crash of 1929. That crash started Black Thursday, October 28, 1929, with the Dow tumbling 12.82%. The next day it sank 11.73%. Together, that two-day drop decimated 23.1% of the Dow’s value. The Dow’s largest percentage decline actually occurred Saturday, December 12, 1914, when it plunged 24.39%. That day the stock market opened for the first time since the outbreak of World War I, five months earlier.¹

 

There are competing theories about why the U.S. market crashed. I won’t go into those. Whatever the catalyst was, the result was the same: Once investors heard that the market was falling, they panicked. Everyone wanted to sell simultaneously. This triggered the program trading: computerized signals programmed by arbitrageurs to create sell orders at certain prices in the market. The program trading flooded the market with more sell orders, exacerbating an already bad decline. Prices plummeted. The plunge ...