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.
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.