Get the Ammo Ready: Defining the Spaghetti Cannon Theory

If you ever have been involved in developing products, you’ve probably heard the saying, “let’s throw these ideas against the wall and see what sticks.” Back in the day, throwing spaghetti against the wall was an old method to test to see if it was ready to be taken out of the boiling water; if it stuck on the wall, the pasta was ready!

 

Over the past couple of days, there was chatter on Twitter about ETFs, strategies, and how it may be wiser to remain in cash vs. investing in a bond fund during this time. This prompted a quote from last week’s Derivative Podcast guest, Robin Wigglesworth’s Book, Trillions:

 

However, all this talk of spaghetti kind of started a virtual ETF food fight of who quoted the spaghetti cannon theory first, and we were here for it!

But we also wanted to break down this simplistic method for those unfamiliar. So, grab the parmesan and an extra piece of garlic bread as we dig into this ETF blast from the past — boun appetito!

There truly is an art of eating spaghetti, and if you ever venture to the “old country,” then you know, pasta is best to be eaten with just a fork, and if you want to get double takes from locals, you can use a spoon; however, you never eat it with a knife! Mastering the twirl of the fork is an underappreciated art, much like choosing the perfect ETF for your portfolio.

Let us explain. In 2000, there was a blitzscaling approach taken by iShares. This is where the infamous “spaghetti cannon” term was coined by ETF fans after an array of providers who churned out increasingly niche products, shooting them against the wall and seeing what stuck.

Ben Johnson, Director of Global ETF Research at Morningstar Research Services LLC, once explained in 2016,  “The asset-management industry has blasted its spaghetti cannon, with investors playing the role of the wall. Fortunately, many investors have displayed a nonstick coating, ignoring the allure of faddish new launches, but that won’t keep the industry from firing volley after volley, trying to get something to stick.”

For reference, there were only 88 ETFs in 2000 with just $70 billion of assets, compared to over 500 index mutual funds that managed $426 billion, according to the Investment Company Institute (ICI). Two decades later, that number has inflated to over 2,793 ETFs and 7.233 trillion assets in the U.S. market. Needless to say, there is a lot of potential; after all, there are TRILLIONs of assets involved here.

In 2021 there were several ETF milestones, having accomplished the following according to the New York Stock Exchange:

  • The first-ever Mutual Fund to ETF Conversion.
  • There were fifty-five brand-new ETF who joined the NYSE Arca ETF issuer community.
  • And over 1,800 ETFs were listed on the NYSE Arca.

 

In fact, the NYSE said that this is the year of the active ETF. New active ETFs outpaced overall new launches in 2021, making up over 70% of all new funds this year. And although they are still a sliver of the overall industry, active ETF launches and assets have rapidly gained steam, gathering $90.1 billion in AUM inflows, with now 55 issuers offering these active ETFs, and 66 new entrants as of 2021.

There are and will always be new funds coming to the menu (market), and many of them are certainly worth your attention. If you are interested in learning more about these alternative options or need some guidance on how/where to begin, don’t worry, we are here to help! And you just don’t have to take our word for it:

But if you’re not ready to jump the gun, or should we say “cannon” in this case, then be sure to watch our episode with Robin Wigglesworth, where we talk about the trillions of dollars tracking three million indices. Check it out below:

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