Nasdaq’s Jacobs: Smarter Beta In Demand

March 05, 2012

Nasdaq is ready to serve up increasingly sophisticated indexes as the ETF market moves beyond pure-beta funds.


Nasdaq, the No. 2 U.S. stock exchange and a growing presence among of index providers, hosted a one-day conference at its New York headquarters last week with data provider Rimes Technologies to take measure of the changing landscape of indexing.

At the event, IndexUniverse Correspondent Alex Ulam caught up with John Jacobs, the executive vice president for Nasdaq Omx’s Global Index Group, to discuss the growing appetite for ‘smart beta” indexes as the $1.2 trillion juggernaut of U.S.-listed ETFs continues to gather momentum.


Ulam: I was talking with a former Nasdaq employee and who said that initially Nasdaq hadn’t moved that aggressively into the ETF indexing space.

Jacobs: I don’t know how to answer that. We are probably the fifth- or sixth-largest indexer for ETFs on the planet. We have 70 indexes.

Ulam: Are there certain parts of the world where you have better penetration than others?

Jacobs: We have more products in the U.S.; then Europe is second; and Asia is third. But in the last 18 months we have launched Nasdaq products in Korea, Japan and China. We also have a smaller fixed-income business in the Nordic countries and we just launched U.S. Treasurys indexes, so we are adding to our index mix and getting more and more business.

Ulam: Global X recently switched its China Technology ETF (NYSEArca: QQQC) to a Nasdaq index. Some people I spoke with said a reason for that sort of change is that Nasdaq has better penetration with Chinese companies, and that more Chinese companies are listed on Nasdaq exchanges.

Jacobs: We are an index company, and one of our advantages is that we also own a bunch of stock exchanges—so we have great insights there. And we also are a technology company that buys technology around the world. So Nasdaq has global access.

When you come to Nasdaq and pick one of our indexes to launch an ETF in the U.S., we can also launch options because we own the biggest options market in the U.S. So we do things that other indexers don’t do.

Ulam: So does your size enable you to offer a cheaper price than other indexers?

Jacobs: That is one of our things—we offer a better value. We offer objective rules-based indexes. We don’t have a committee. It is all rules based, so everyone can see what is in our indexes and how they are constructed. Secondly, we are very low cost and very lean. We don’t have a high cost structure, so we try to offer a better value.

Other people don’t know markets and they cannot open up markets. We think that our value proposition as an indexer is something that cannot be matched by any other indexer.



Ulam: I’ve been looking at low-volatility funds recently, and one issue that comes up is that people who are investing in broader indexes like to have a "low vol" version so that they can see where the risk premia and the risk are coming from.

Jacobs: Absolutely. What we’re seeing is people getting smart about indexing and not relying on just the S&P or the Nasdaq. They want to know the risk and return. They want to know the volatility. What we’re hearing is: “Please, don’t give me another broad-based index, I need indexes that show me more and that have ways to measure and isolate factors.”

Ulam: So these low-volatility funds and value funds help you with your larger index tracking funds?

Jacobs: Absolutely; they help you understand what you are seeing in the bigger broader index.

Ulam: You were talking about blended funds earlier. What blended funds were you referring to?

Jacobs: You are going to see more and more of these blended indexes where, rather than saying I am going to put 50 percent in equities and 50 percent in debt, if you just put 100 percent in a blended index of that portfolio, you would have had a far better return over time than if you had picked one or the other, or dumped 50 percent into a bond ETF and 50 percent into an equity ETF. Plus there are transaction costs to balancing. And now it is all about transaction costs.

Ulam: You’re saying a blended index really gives you a better return?

Jacobs: Yes: The risk-adjusted return, less transaction costs, over time. You are still going to be moving positions—buying and selling ETFs or whatever—to track those two indexes. And transaction costs and data costs are the enemy of the portfolio manager who has a pure benchmark.

It’s all about basis points. Going back to John Bogle: Basis points matter over time.


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