Structure Matters: Blitzer On Index Changes

February 25, 2014

Weiskopf: So when somebody—Fitch—downgrades a credit and others haven't, how do you choose which one to follow?

Blitzer: Doesn’t matter which rating agency is first, second or third. When an index sets minimum rating such as BBB, the lowest investment-grade rating, we will follow whichever agency has the lowest rating on a bond.

For example, if Fitch rates a bond BB+ while S&P and Moody’s rate it BBB-, we will exclude the bond from an investment-grade index.

Weiskopf: How many indexes might there be available to be licensed?

Blitzer: The Dow Jones indexes business was combined with S&P Indices a couple of years ago, to form S&P Dow Jones Indices. When it was put together, we estimated that we had—after we got rid of a few overlaps—roughly 800,000 indices. From a practical point of view, if someone identifies a market or market segment and a way to represent that market, an index can be constructed and could be the basis of an investment product.

Weiskopf: There’s a lot of debate about “smart beta.” How would you describe a smart-beta ETF?

Blitzer: My description is that we look back at financial research that's been done, academic as well as practical, and in particular look at the work of Gene Fama, who’s one of the people who received the Nobel Laureate award in economics in 2013. Gene Fama, along with Kenneth French, wrote a series of papers on small-cap stocks and value stocks. What they found to be true consistently across different time periods and different markets around the world for equities was that over time, smaller-sized stocks outperformed larger-sized stocks, and value stocks outperformed growth stocks.

This is saying that if I re-engineer the standard market-cap-weighted index to overweight small-cap and value stocks, you would see stronger results.

One thing I would add is that the simplest way to do this is to weight all of the stocks equally instead of by market cap. In the S&P 500, this would be one-fifth of 1 percent, or 20 basis points, for each stock. The beauty of this strategy is that in two words I can describe the index—equally weighted. The simplest approach sometimes can be best understood.

Weiskopf: Should we look at a different label than “smart beta”? Should it be “alpha strategies”?

Blitzer: First of all, here at S&P Dow Jones Indices, we don’t like the term “smart beta” for exactly the reason you suggested.

I believe that investing with indices is smart. I would call it “intelligent investing.” I don’t like “passive investing.” It sounds like we all went to sleep. I think index investing is more intelligent than active management because you get to keep more of your money and you give away less in fees. And that, I’m willing to say, is smart.

Beta is what measures the change in your portfolio based on whether the market went up and down. Alpha is what measures the return of your portfolio based on how different you are from the market. And that’s the strict rule.

Dan Weiskopf is a portfolio manager of Access ETF Solutions LLC, whose third-party ETF strategies are offered through IPI Wealth Management, Inc. (IPI). IPI is an SEC-registered investment advisor, with its principal office located at 226 W. Eldorado St., Decatur, IL 62522, 217-425-6340. Access ETF Solutions LLC was established in 2013 with a focus that structure matters in selecting ETFs.

References to specific securities or market indexes are not intended as specific investment advice. All interviews have been approved for release by the individual and the individual’s affiliated firms, and the information is for institutional investors only. Readers are advised to read the full transcript of the interview including disclosures at or contact Dan Weiskopf at 212-628-4882.




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