THE FAST TRACK: Along came a Spider — and made a bundle

Gary Gastineau says he’s “not a table-pounding kind of person,” but he has been quietly leading a revolution in the investment world just the same.

Mr. Gastineau, 59, is generally credited with being one of the forefathers of exchange-traded index funds, which have attracted more than $34 billion since their creation early in the last decade. More than 80% of that has come from retail investors seeking a safer way to take advantage of the bull market for individual stocks that’s more flexible than holding mutual funds.

A senior vice president of new product development for five years at the American Stock Exchange — the nursery for exchange-traded funds — he quit earlier this month to spread the gospel at John Nuveen Co.

In his new role as managing director of exchange-traded product development within the Chicago bond fund house’s structured investments division, Mr. Gastineau will help it create such instruments, as well as related products that will mimic some of Nuveen’s unit investment trusts.

At the Amex, Mr. Gastineau was instrumental in helping to bring exchange-indexed securities to market. Not exactly their inventor, he was one of their pioneers.

At the exchange, SPDRs (pronounced “Spiders,” depositary receipts linked to Standard & Poor’s 500 stock index) had already been introduced, but he added to the concept. He credits himself as the inventor of Webs (for world equity benchmark securities, which are linked to 17 country indexes), Diamonds, which track the Dow Jones Industrial Average, and other exchange-traded funds.

These securities closely resemble index mutual funds in that they assemble and track a preset basket of stocks. Unlike mutual funds, though, they are priced continuously throughout the day and can even be shorted.

“While you can’t call these mutual funds because they don’t price once per day like mutual funds, they are in fact the functional equivalent of mutual funds,” he says.

Mr. Gastineau predicts that the next generation of such exchange-traded securities will be based on everyday mutual funds. “We keep hearing about lots of opposition in the fund industry,” he says, predicting that fund companies will start a separate share class that trades throughout the day.

A graduate of Harvard College in 1962 and Harvard’s Graduate School of Business Administration in 1964, he was tinkering with options and options modeling even then.

“I did very well in my own account,” says Mr. Gastineau.

In the early ’70s, Mr. Gastineau was employed as a securities analyst and portfolio manager, but options were always his passion.

To one of the early firms he worked for, “I suggested a modification, a cool way to compare two options on the same stock or options on two different stocks,” he says.

The first real breakthrough, though, came in 1973 when the Chicago Board Options Exchange opened. Mr. Gastineau sensed a new opportunity. “Exchange-traded funds were just a natural progression,” he says.

He helped launch an options service at a boutique firm. Then in the late ’70s and early ’80s, he worked at Kidder Peabody & Co. as vice president and manager of its options portfolio service, overseeing $45 million.

In 1995, after serving as vice president for several firms, Mr. Gastineau leaped at the chance to work at the Amex developing more exchange-traded index securities, then a concept only two years old.

Exchange traded funds, like the 51 that San Francisco-based Barclays Global Investors launched at the end of 1999, offer liquidity, diversification and greater tax efficiency.

In a mutual fund, a portfolio manager must sell a stock to raise money for redemptions if investors bail out; an exchange-traded security trades like a stock, which means merely that its price falls if it becomes less attractive.

Consequently, there is no taxable capital gain distribution, as with a mutual fund, for shareholders to get stuck with.

Moreover, says Mr. Gastineau, exchange traded funds rival typical index mutual funds’ low cost.

Spiders, for example, have an expense ratio of about 0.18%, about the same as Vanguard Group’s 500 Index Fund. And Mr. Gastineau’s experience has shown that only about 10% of exchange-traded money is “hot” and traded rapidly, the balance is held in long-term accounts.

Because of their popularity, the Securities and Exchange Commission has put these relatively new-fangled investments under the microscope, Mr. Gastineau says.

“The regulatory process will work itself out once the SEC realizes that these products are good for the conventional fund shareholder,” he says. “We can persuade the SEC that these products are inherently superior for consumers.”