Meet the SPY Kids

Episode Summary

Executive Summary: The episode explores the bizarre origin story of SPY, the largest ETF, revealing that its UIT structure required naming 11 individuals so the fund could persist beyond its initial term. Bloomberg reporter Rachel Evans, ETF expert Eric Balchunas, and three of the named “Spy Kids” explain how a legal workaround tied the fund’s lifespan to human lives, how the story resurfaced on Twitter, and why SPY’s structure still matters for investors and ETF history.

Main Topics: The viral discovery of SPY’s unusual trust structure (Priority: 5/5): A Bloomberg article uncovered that SPY, unlike most ETFs, was structured as a unit investment trust with an expiration mechanism tied to a set date and the deaths of named individuals. Why SPY became the dominant ETF (Priority: 5/5): Eric Balchunas explains that SPY’s extreme liquidity, trading volume, and broad investor base made it central to markets, even with structural drawbacks versus other S&P 500 ETFs. How the ‘Spy Kids’ were selected (Priority: 4/5): Rachel Evans and the guests describe how baby names were gathered from people connected to the American Stock Exchange and incorporated into the trust as a legal extension device. The role of Nathan Most and ETF innovation (Priority: 5/5): The episode places SPY in historical context, crediting Nathan Most and colleagues at the American Stock Exchange with creating the first ETF framework after the 1987 crash. Reactions from the named individuals (Priority: 4/5): The named adults react with surprise, amusement, and mild anxiety after being contacted by a reporter and learning they are tied to a $250 billion fund. Legal and structural implications for SPY’s future (Priority: 4/5): The discussion notes that New York’s rule against perpetuities has been removed, so SPY can likely be amended again rather than truly expire in 2118.

Key Arguments: SPY is unusually important because its liquidity and trading volume make it a foundational market instrument, even if other S&P 500 ETFs are cheaper and structurally more efficient. The UIT structure caused SPY to have constraints not shared by open-end ETFs, including quarterly dividend reinvestment and no securities lending. The original ETF needed a legal workaround to satisfy the rule against perpetuities, which led to naming 11 people whose deaths could extend the trust. The named individuals were not chosen randomly; many were connected to the American Stock Exchange and were likely included because their parents or relatives were involved in launching the product. Nathan Most’s work on SPY and ETFs is portrayed as one of the most consequential financial innovations of the last half-century. The current termination date is not necessarily final because the trust may be amended again now that the perpetuities rule no longer applies in New York. The story illustrates how financial innovation often depends on arcane legal structures and the people behind them, not just markets and products.

Data Points: SPY daily trading volume: about $20 billion a day - Eric Balchunas uses this to show SPY’s dominance and liquidity relative to stocks and other ETFs. Most traded equity comparison: 3 to 4 times more than the next most traded stock - SPY trades more daily than Apple or Amazon on many days. Share of ETF assets in UITs: about 10% of ETF assets, or $360 billion - Eric notes that only a handful of ETFs use the UIT structure. Initial trust term: 25 years from 1993 - Rachel explains the original SPY trust would have matured around 2018. Extension period: 100 years - The trust was later extended well beyond its original term. Additional lifespan rule: 20 years beyond the death of the last of 11 named individuals - This was added to further extend the trust’s duration. Potential termination year: 2118 - The episode cites this as the current possible end date for SPY. SPY performance since 1993: up about 1,000% - Eric mentions this to show the product’s long-term appreciation. Number of named individuals: 11 - The trust document included 11 people whose lives were tied to SPY’s duration. ETF market history trigger: after the 1987 exchange crash - The origin of the ETF structure is linked to the search for a tradable product after market disruption.

Pivotal Quotes: "the fund would either end at this termination date or when the last of 11 people named in the documentation died" — Rachel Evans: Explaining the viral discovery that sparked the story. "I thought it was fascinating" — Eric Balchunas: His reaction to the Bloomberg article and the SPY kids revelation. "You think you're finally, like, in the right hands. You're just not." — Podcast promo narration: From the ad at the beginning, setting a tone of caution and disillusionment.

Implications: The episode shows how market infrastructure can hinge on obscure legal design choices and human stories. For listeners, it reveals why SPY matters beyond trading; for the industry, it underscores how ETF rules, history, and structure continue to shape product longevity and investor outcomes.