Do you think the industry has gotten too diverse and complex?
I don't know about the industry. Clearly the investment options have gotten increasingly diverse and increasingly complex, and I think this is generally true, and not just of products that track indexes. For example, futures traded on the VIX—there is nothing wrong with those, but there are investors who shouldn't trade these because they don't have the experience and the understanding of futures markets and the understanding of the characteristics of the VIX.
The flip side is somebody who wants to set aside a little money for the long term and invest, but is not an investment professional or an experienced investor, can buy a low-fee fund that tracks the S&P 500 and own a portfolio of 500 well-known substantial companies. That's the triumph of indexing.
What do you see as being left for indexing in terms of growth, asset classes, strategies, innovations? What do you see as the problems left to solve?
If you look at Bob Shiller's original hope for what is now the S&P/Case-Shiller Home Price Indexes, it was the idea that here is an approach or an analytical method called indexing, and not only are we going to turn it into something that you can build financial products on, but we're going to do it in a way that people can use it to manage their risks. One of his goals was that people would be able to look at some of the major financial risks that they face and have ways to manage those risks. They might decide not to use the products or not to hedge something, but at least they would have the option to do so.
Clearly, we're looking at housing, and we're active in the area. We're also looking at some other things. We have indexes tracking health care expenses, for example; corporations would be able to hedge some of their health care expenditures, a substantial risk for many employers. If they could hedge, they might be likely to give better employee benefits.
That is an area where we have barely scratched the surface—to look at things in the economy that we can develop indexes for and thereby make them much easier to understand and make it easier to manage the risks they represent.
New financial asset classes—I'm not sure there is a whole lot there. There have been indexes of foreign exchange rates for years. The Fed publishes a bunch of them. Nobody trades them, because it's easier to get trades through foreign exchange.
Fixed income is pretty well covered, including credit default swaps. Equities are clearly well covered. Commodities are well covered. I touched on real estate and medical expenses. There are probably some other categories there, and we will see proposals for these things.
What role does indexing play in your own portfolio?
First, S&P won't let me buy or hold individual stocks. My investments that I easier to manage directly are in exchange-traded funds. I also have some money in a portfolio that only holds ETFs that is managed by an outside, independent manager. The only stock I own directly is McGraw-Hill Financial [which owns S&P Dow Jones Indices]. Usually I look at that and say, "Nobody should be heavily concentrated in the company he works for, because he already has a big bet on that company." I tend to diversify away from that. And it's not an investment opinion on McGraw-Hill. It's an investment opinion on diversification.