This is the 13th in a series of interviews with some of the most influential people in the field of indexing and index-based investment. The interviews are also published in the November/December 2014 issue of the Journal of Indexes.
With his ever-present bow ties, David Blitzer is probably one of the most recognizable faces in indexing. He is the chairman of the index committee at S&P Dow Jones Indices, and as such, oversees the two most widely followed and widely quoted indexes in the world—the S&P 500 and the Dow Jones industrial average—in addition to the rest of the firm's benchmarks. Blitzer is also a respected economist who is featured frequently in the media. His "Talking Indexes" columns have appeared in almost every issue of the Journal of Indexes for the better part of a decade.
What do you see as the biggest positive or negative developments in the indexing space in the last 20 years?
On the positive side is the growth and acceptance of index investing. The active managers are getting a bad name lately, and there seems to be both among individuals and among institutions an increasing interest in and the acceptance of the idea of investing with indexes and doing it through ETFs. I don't know if ETFs alone are the biggest positive development, but they are certainly part of the growth of indexing, so that to me is really an outstanding thing.
What do you see as the negative development?
I don't see any regulatory developments that have been negative or damaging for indexes. The major index providers are following the IOSCO Principles to assure transparency and eliminate any conflicts of interest. For investors, this is a positive step; it formalizes much of what we have been doing all along.
There are a few things on the edges that I sometimes worry about, like active ETFs, which should be sort of a nonsequitur in the sense that they eliminate those arguments about the transparency. Then there's self-indexing. I'm not suggesting that any of the few ETF issuers that self-index are doing anything wrong, but it does open the door to abuses. Those kinds of things are concerns.
What do you see as the core features of pretty much every sound index, e.g., no matter the asset class, no matter the strategy? What do they all have in common, in your opinion?
They should be transparent and they should be understandable. Investors should know what they are buying, though that's not to say that if the index holds some company that has a 1,000-page-long 10-Q report that the investors should have read the whole thing. Investors should have an idea of what the index is intended to do. If they're buying a fund that tracks an index of technology IPOs, they ought to be able to know that that is different than buying a fund that tracks an index of utilities that pay dividends. Transparency provides that, which I think is a very important feature of indexing.
The S&P 500 is the go-to index for a lot of people. What do you think underlies its dominance?
First, having assets of almost $2 trillion tracking the S&P 500 is one factor. There are other key factors. It is 500 stocks, currently about 80 to 85 percent of the value of the total U.S. market. It is not the 500 largest stocks; rather, they are liquid and viable, and the mix reflects the overall market. It is a very good representation of the U.S. market. One result is that the statistics of the index—returns, volatility, earnings, PE, all the specifics of the index—tell you what is going on in the market.
It's not as old as the Dow. It's not as widely reported as the Dow, but there is a difference between 500 stocks market cap weighted and 30 stocks price weighted. And we do both of them. In fact, I chair both committees, and they are separate committees. But the indexes have different positions in terms of the markets and in terms of the way people think of them.
Another thing about the 500 is that we have maintained the transparency that I mentioned earlier. We explain it. We make sure that information about it—adding stocks or removing stocks, changes in methodology—is available to everybody on a level playing field, no favoritism. Second, when there are issues that have to be dealt with, we deal with them; we will pose questions to investors and people in the market to gather information. We're not maintaining the index in a vacuum. On the contrary, we spend a whole lot of time listening.