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Eleven Ordinary Twenty-Somethings With $250B Riding on Their Lives (bloomberg.com)
84 points by mxfh 72 days ago | hide | past | web | favorite | 26 comments

I wonder if this is related to the rule against perpetuities; basically in some jurisdictions you can't have a trust that exists forever even though that doesn't really matter for an ETF.


yep, it is, new york is one of the states where that rule applies

This is really confusing, I wish Matt Levine would take it up. Could someone perhaps explain exactly what’s going on here? I get that they use the names of these children, but they didn’t say if there was more to it. If it’s just the names it could be anyone. How does it tie specifically to each child?

He did. It was in today's column.

In describing what would happen if all of them died and the trust had to be shut down:

"...money could move from SPY I to SPY II by passing a basket of S&P 500 stocks from SPY I to a bank trading desk, and from that trading desk to SPY II, without ever selling it in the market..."

"...the assets of SPY I would pretty efficiently move over to SPY II, and the price of the underlying stocks would not be affected. Some retail investors wouldn’t want to move, because the move would trigger taxable gains for them, but over 20 years that problem would mostly go away as they cash out naturally. By 2039, the trust’s accelerated end date, SPY I would be pretty small and the real S&P 500 index ETF action would be in SPY II. No one would have to dump stock along the way, and the short-selling supervillain would never be rewarded for his evil deeds."

> SPY as we know it will cease to be on Jan. 22, 2118, or 20 years “after the death of the last survivor of the eleven persons” -- whichever occurs first. The structure doesn’t provide those people with a financial interest in SPY.

If SPY ceased to exist what would be the effect on the markets?

People would just shift their holdings to SPY2 or something before the expiration and there would be no effect.

What if they all died without warning, on the same day?

Then you still have 20 years to switch everyone over.

I'd be concerned that there was some tradeable pattern to the end of such a fund that may translate to an increased risk of death for the named parties.

According to Matt Levine, the underlying stocks would not have to be bought and sold if the trust ended and a new one was created. So the trusts wouldn't incur taxes and it shouldn't affect the price of the stocks.

Can someone post a tldr for those who can’t read the article proper?

"Thanks to a quirk in the legal structure used to set up the SPDR S&P 500 ETF Trust, known as SPY, more than $250 billion rests on the longevity of 11 ordinary kids born between May 1990 and January 1993."

By law funds require a determines termination. They tied it to the death of "random" kids. The fund will end in 2118 or 20 years after the last of these eleven kids (chosen, "voluntarily" by their parents, as token people) dies

It' relatively clear and straightforward, but the article does not explain what happens when the fund terminates.

If you want to know, it's probably in the prospectus. I'd be shocked if termination called for anything other than liquidating the holdings of the trust and distributing the proceeds pro-rata to shareholders. Even if something weird was supposed to happen, there would be at least 20 years of notice for everyone to get their money out.

Since it's an ETF, I'm pretty sure you can hand in your SPY shares to the trust and they'll give you the underlying S&P 500 companies' shares without even having to sell.

Only authorized participants can do that.

ETF shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, less wealthy investors must buy and sell ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may pay more than net asset value (NAV) when buying and receive less than net asset value when selling.

Why wouldn't they just send a fixed time? Why would anyone want to use random kids as their oracle?

Most likely the relevant rule against perpetuities has a limit of X years or death of a named person + 20 years. And the X is known, but likely to be less than the longest life + 20 years.

The traditional rule against perpetuities is the life of someone alive when the trust is created plus 21 years. That is also the rule in New York, in section 9-1.1 of the Estates, Powers and Trusts Law. SPY’s lawyers probably chose 20 years to be on the safe side.

There's only one way to find out. And if these kids start dying mysterious deaths, we'll know that someone has decided to go that route.

I was just thinking this would make a great plot of a spy novel. Since it began so long ago, I think Robert Litell would be perfect

I totally got a Robert Ludlum vibe.

That would be the result of a tontine.


Fund terminates, bankers win

I hate it when you submit a story and come to find that someone else already submitted it before you. /rant

Of course it’s a good story.

Eleven ordinary twenty-somethings??? They're not ordinary at all. They are Spy Kids.

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