Structure Matters: Blitzer On Index Changes
“Structure Matters,” by Dan Weiskopf, portfolio manager of Access ETF Solutions, examines issues about ETF structure in a series of interviews with ETF portfolio managers, index developers and other people who affect the structure of ETFs. The goal of the series is to highlight the different operating roles that individuals have that make the ETF structure work well for the investor. In this installment, Weiskopf interviews David Blitzer, managing director, chairman of the Index Committee of S&P Dow Jones Indexes.
Dan Weiskopf: As the managing director and chairman of the S&P Dow Jones Index Committee, can you outline what the Index Committee does and how many people are involved?
David Blitzer: We’ll talk about what we internally call the U.S. committee, which is the committee that covers the S&P 500, S&P MidCap 400, S&P SmallCap 600, and some other less widely known indices. In the background, we have roughly 30 committees covering markets and indices across stocks, bonds and commodities and just about any market anywhere in the world where a U.S. investor can buy or sell stocks, bonds or other investments. The U.S. committee and the S&P 500 is what most people talk about.
There are nine members on the U.S. Index Committee. Eight of the nine are full-time employees of S&P Dow Jones Indices, and the ninth is an attorney from McGraw-Hill Financial’s legal department [S&P DJI’s corporate parent]. The committee is focused exclusively on index management and calculation and has no commercial responsibilities. This way, we have no commercial conflicts and make all decisions based on investment issues only.
Decisions we make include how corporate events or actions affect the index. These include acquisitions, bankruptcies and just about anything else a company might encounter. For instance, if two companies in the index merge, we need to decide if the merged company remains in the index, select a new member and then follow the timing of the deal.
Once the committee’s decision is made, the transaction is monitored by the index manager who tracks the transaction thereafter. We publish a press release to our public website at 5:15 p.m. Eastern time usually five days after the decision has been made. All investors get the news at the same time.
Another thing we’ll do at a meeting is maintain a confidential list of candidate companies that we review and approve. For the S&P 500, there are usually about five to 10 approved names on the list.
Weiskopf: How did you go about making the decision to add Facebook to the S&P 500?
Blitzer: Facebook was probably the high-profile addition of 2013. The committee was familiar with Facebook. One of our requirements is that a company should have four consecutive quarters of positive earnings under generally accepted accounting principles, which sometimes makes us look sort of stubborn at times, but our experience is that it is not an unreasonable requirement for adding a company to an index.
Once a company is in the 500, if it had a bad quarter, we're not going to drop it immediately. Getting in is a little harder or restrictive than staying in. We were tracking Facebook for a while. Last fall, it passed the four-quarters rule.
Facebook is a big company, so we wanted to time the addition to when there would be a lot of liquidity in the market. One can’t add a company this big on a very slow trading day, like the day after Thanksgiving, for example. If one did that, the price would run up. Instead, we look for a day or days when we expect a lot of trading and only modest market impact.
Our annual fixed-income conference is coming up in a little more than a week and I can’t wait.
Some ETFs really do track their indexes better than others.
iShares’ new commodity fund splits the finest of marketing hairs.
Equity ETFs that rely on VIX derivatives to hedge downside risk yield a surprising range of results.