Why Dave Nadig Is An Idiot

April 06, 2011

Picking on the Nasdaq-100 is arbitrary when the whole index world is full of misfits.

Yesterday Dave Nadig claimed to identify “the worst index in the world.” A bold statement if ever I’ve heard one.

There’s a reason we call Dave “Classroom” around here. While the rest of us are grounded in the reality of the ETF industry, Dave is deep in its underbelly: the world of indexing academia. Utter the phrase “funky index weighting” and Dave’s head shoots up from a textbook big enough to bludgeon someone with and peers at you through his Coke-bottle glasses.

Maybe they’re not that thick. I’m pretty sure they’re taped together, though.

Dave is as book-smart as they come, but he's got the court-vision of a lawn-rooting mole.

So, the “worst index in the world,” eh? My guess is that the worst index in the world has NO dollars attached to it. My guess is that the index with $300 billion tracking it (including the seventh-largest ETF in the world) must be doing something right for someone.

Why on Earth would Dave single out the Nasdaq 100? The world of indexes is like a roomful of eccentric relatives.

You’ve got the Uncle Eddy of indexes, the price-weighted Dow Jones industrial average, sitting on one of the biggest brands in indexing. Or its cousin, Aunt Millie, the S&P 500—handpicked by an index committee while somehow managing to own the mantle of the most widely tracked, liquid index in the world.

Then, there’s the Hatfields—played by MSCI—dominating the country-benchmarking business with nigh-untrackable indexes, a bane to the existence of holders who need to be RIC compliant. And don’t forget the McCoys, or Russell, eclipsing all others in the U.S. institutional benchmark space and so widely tracked that there’s a whole category of investors who try to make a living front-running their index changes.

To pick on the poor Nasdaq-100 seems almost arbitrarily gratuitous. It’s hardly the black sheep of indexes that are responsible for a huge proportion of the benchmarked global assets. It's just one in a family full of quaint eccentrics.

Now, is the Nasdaq-100 quirky? Heck yes it is. I’ve never heard the story, but can imagine John Jacobs with a pen and napkin in a bar, having come up with a plan for how to solve that dastardly (RIC compliance) problem that the MSCI benchmarks I mentioned are beset with.

It started as a cap-weighted index, remember. All this weirdness around bringing down weight and distributing it to the sub-1 percent constituents until they hit 1 percent was only instituted to keep Microsoft under control and the index compliant with requirements for regulated investment companies (RIC). And one could argue that Apple may not even run into the size issue.

But, of course, all the activity around the rebalance will certainly goose up that Nasdaq trading a bit in advance of its run on NYSE/Euronext. Classroom doesn’t even mention that.

Why not just turn it into a cap-weighted index? Set it and forget it. That’s what I’d do. Leave the fund managers to deal with the occasional, rare RIC issues. What do you say, John Jacobs? I’ve got a pen and some napkins. We can figure it out.



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