Speaker 1: Welcome to Trillions. I'm Joel Webber and I'm Eric bel Tunis. Eric.
Speaker 1: How you holding up? Man? Pretty good. I've been getting
Speaker 1: out a little more. Um, I've got a tennis hobby
Speaker 1: going on and that's been great. I mean, you know,
Speaker 1: trying to get out and keep moving as much as possible.
Speaker 1: And I'm going to go in the office actually next
Speaker 1: week for the first time. So my son just started
Speaker 1: remote kindergarten and I will tell you that is an oxymoron. Yeah,
Speaker 1: that's that's crazy. Yeah. So let's let's talk about this
Speaker 1: episode of Trillions. Yeah, this is I can't remember being
Speaker 1: more excited for an episode than this one, especially because
Speaker 1: of some recent news. So everybody knows the sp F
Speaker 1: it is. It's beyond a rock star. It's really kind
Speaker 1: of the sun that the whole thing revolves around. I mean,
Speaker 1: it's got eleven trillion dollars benchmark to it. Everybody knows it.
Speaker 1: The media quotes that constantly. It is the It is
Speaker 1: the biggest thing out there, really definitely the most infellectual
Speaker 1: thing in the passive world, if not the active world.
Speaker 1: Every active manager is trying to beat it, everybody's benchmark
Speaker 1: to it, etcetera. So we're going to be able to
Speaker 1: speak to somebody who basically was the head of the
Speaker 1: quote committee that ran the SMP five hundred. And the
Speaker 1: reason this is so interesting is that most indexes have
Speaker 1: rigid rules and and so does the SMP. But unlike
Speaker 1: other indexes, most of them, the SMP has a committee
Speaker 1: of humans who can override the rules. And recently they
Speaker 1: decided not to add Tesla, which is the top twenty
Speaker 1: biggest stock, and it's they're gonna delay atting it. And
Speaker 1: it just shows you that humans are essentially in control
Speaker 1: of this index. And we're going to talk to the
Speaker 1: man who was the head of the committee for about
Speaker 1: fifteen years, and that uh somebody is David Blitzer. He's
Speaker 1: now retired, but like you mentioned, Derek, he was the
Speaker 1: head of the SMP index committee from n to nineteen,
Speaker 1: which is an incredible stretch. I mean, he's basically seen
Speaker 1: it all and we get to talk to him. Also
Speaker 1: joining us is going to be Katherine greifeld uh et
Speaker 1: F reporter with Bloomberg News, this time on Trilliance, the
Speaker 1: Sun of the stocked Solar system. David Blitzer, thanks for
Speaker 1: joining us on trillians Pleasure So I want to ask
Speaker 1: about the elephant in the room, which Eric mentioned in
Speaker 1: the intro. But S and P obviously hugely important. The
Speaker 1: index is just this, this gigantic thing that we all
Speaker 1: think about and watch constantly. And there was this event
Speaker 1: recently where the index was gonna potentially add some new
Speaker 1: names and one of the big name, Tesla, was excluded,
Speaker 1: even though it checked all the boxes. Why wasn't it included? Well,
Speaker 1: exactly why the committee did something in the last few weeks.
Speaker 1: How to know? It's I think back the past history
Speaker 1: and so on. Um. But first thinking back, there are
Speaker 1: plenty of times when they're big names are popular names,
Speaker 1: well known names that don't get add at the moment
Speaker 1: they're eligible or something like that. In fact, probably cent
Speaker 1: of the time only the committee knows what is and
Speaker 1: is not eligible because in the season have gotten big
Speaker 1: because everybody talks about Tesla. UM at least a thousand
Speaker 1: people went to the website, downloaded the methodology of the
Speaker 1: road book and checked all the boxes at oh my gosh, um.
Speaker 1: Most of the time, you know, they're nine people sitting
Speaker 1: down in Water Street, nobody else. Those are cares. But
Speaker 1: I think the real question is why the rush. Uh.
Speaker 1: Stocks can sit out there. Um, if you had a stock,
Speaker 1: it gets a little bump for a few weeks, and
Speaker 1: the bump goes away. And the committee's goal, at least
Speaker 1: certainly in the past, because well, all I'm saying is
Speaker 1: in the PAD committee's goal is to have an index
Speaker 1: that really is a great measure of the market. The
Speaker 1: market goes up, the index goes up. Any statistic about
Speaker 1: the market, you can do the same calculation on the
Speaker 1: index and you'll be very close. That's the goal, and
Speaker 1: so adding a company is to look at the index,
Speaker 1: look at the market, and say, is there something that's
Speaker 1: we're I lined up quite right with? And then you
Speaker 1: also look at what's happening in the market. What's happening
Speaker 1: in the index, Um is some big company to give
Speaker 1: be acquired six weeks out and we'd rather wait for
Speaker 1: that one than do it now kind of stuff. So
Speaker 1: there's no rush. In fact, there's a rule I think of.
Speaker 1: There used to be a rule anyhow, It said that
Speaker 1: you had to have a stock paid for at least
Speaker 1: twelve months before you even thought about it. That Tasma
Speaker 1: Zombi meets that rule. But there are plenty of other
Speaker 1: hot stacks over the time when you know, we waited,
Speaker 1: I can't do this yet, that's we just kind of
Speaker 1: sit tight. I think that's logical. Most people would agree
Speaker 1: to most of that. But all the other large cap
Speaker 1: indexes do have tesla. And is there a fear that
Speaker 1: there's an assumption that a lot of people just look
Speaker 1: at the spop hundred is trying to capture the stock
Speaker 1: market and the biggest stocks generally, and by not having
Speaker 1: it month after month, you aren't able to do that
Speaker 1: when some of your competing indexes do do that because
Speaker 1: they do have tesla. Well, certainly most people think the
Speaker 1: five hundred, five hundred biggest stocks, and it's not a
Speaker 1: lot of people think that. Um No, I don't when
Speaker 1: it comes to competing and we're doing better, doing worse
Speaker 1: than than the competition. Um it's not been on a
Speaker 1: single stock basis. One case where it has come up
Speaker 1: a lot is between the top six hundred, which is
Speaker 1: run small camps run by the same committee, and the
Speaker 1: Russell Too thousand, and that one of the big differences
Speaker 1: there is that for the six hundred, like the five hundred,
Speaker 1: company has to be profitable before it's put in. Let's
Speaker 1: start losing money later on, it may stay in Russell
Speaker 1: has no profitability rule, and in fact, S ANDPS analysts
Speaker 1: have pranked out reports year after year after year pointing
Speaker 1: out that the six hundred does better because of the
Speaker 1: profits rule, either as a marketing thing, as absolutely correct analysts. So, David,
Speaker 1: I want to ask, you, know, thinking back on your
Speaker 1: time on the committee, have there been other cases where
Speaker 1: maybe you waited a little bit, even though a name
Speaker 1: was eligible going by the rules, you waited to add it.
Speaker 1: And I'm curious how that worked out, whether the shock
Speaker 1: or backlash was to the same level that we've seen
Speaker 1: to Tesla not being included. Yeah. Um, now sitting on
Speaker 1: the outside and maybe prepare comparison. Uh, the amount of
Speaker 1: chatter about Tesco is staggering. I've gotten calls from people
Speaker 1: who know I'm not hadn't been on the committee for
Speaker 1: a year and a half and who barely never called
Speaker 1: me about stocks and they said, why didn't they do it?
Speaker 1: Where's it going in time? So there's a huge amount
Speaker 1: of stuff they closest an think about, UH was Microsoft
Speaker 1: and way back then Microsoft went publican about and up
Speaker 1: until some time in the early nineties, dates and Allen
Speaker 1: together owned about sixty of the two thirds of the stock,
Speaker 1: and then in in fact for most of the town
Speaker 1: of Ireland and committee it you had more than half
Speaker 1: the stock postly controlled was ineligible. And we got pounded
Speaker 1: a whole lot about Microsoft because it was as big
Speaker 1: then as Tesco is now maybe, And after the fact
Speaker 1: we still got they sold some stock, we put it
Speaker 1: in the in deck, everybody figuring to forget it, and
Speaker 1: we still got who played, why did you ad it?
Speaker 1: So on? So there have been other big ones. But um,
Speaker 1: you know, I guess someoneays used to learn to shrug
Speaker 1: and say, you know, wait till next month. It's nothing
Speaker 1: of that. David, Can I ask about the committee because
Speaker 1: there's a question that, Um, I think it's really important.
Speaker 1: Is the first role of the committee not to talk
Speaker 1: about the committee? Well, there's there's an evolution in this.
Speaker 1: And I was on the committee started in nineteen nine
Speaker 1: and then became chairman in n and the fellow who
Speaker 1: preceded me as chair he stayed on the committee and
Speaker 1: he's a great guy, very sharp. Thank you probably do
Speaker 1: more in that end the season. I did at that moment,
Speaker 1: and I went to one of the senior executives, and
Speaker 1: I said, now, now that gave you switched us. What
Speaker 1: am I supposed to do? Elliott didn't do And at
Speaker 1: that time I was chief economisted and they said, look,
Speaker 1: you just like you get to talk about the economy
Speaker 1: and the markets, and the press talk about the Index.
Speaker 1: So my charge was to get out there and they
Speaker 1: act that idea has changed over time and rolled forward
Speaker 1: to early twenty nine UM and for a whole lot
Speaker 1: of reasons, people the anxiety of the lawyers and regulation
Speaker 1: and some other things things that had shifted, and the
Speaker 1: idea was that the chair of the indext comity shouldn't
Speaker 1: be like a front and center spoke first. Between ninety
Speaker 1: five and two thousand, the number of employees probably went
Speaker 1: up like, uh, twenty five people in Index and when
Speaker 1: I left, to have that six hundreds the organization, you're
Speaker 1: gonna go bigger, and instead of one or two spokespeople,
Speaker 1: we probably had fifty two folks people. So the Index
Speaker 1: parent would have gotten lost in the crowd. There was
Speaker 1: a specific decision not to list all the members because
Speaker 1: early on, probably sometime in the late nineties, Forbes magazine
Speaker 1: wrote us up. They had a picture Hagan in his
Speaker 1: very ornate wood panel dining room. Uh. We used to
Speaker 1: call it the Supreme Court picture because we looked as
Speaker 1: as serious as as the classic pictures of the of
Speaker 1: the Justices. UM. But the day of that story ran,
Speaker 1: everybody on the committee got identical uh FedEx packages from
Speaker 1: various companies that wanted in. So that's why you know
Speaker 1: one day now, but everybody else got to be anonymous
Speaker 1: accept me. So I got all the FedEx packages in
Speaker 1: the phone call. That's that's great. The Supreme Court visual
Speaker 1: will is perfect because I actually had that metaphor in
Speaker 1: my next question, how does it work? Are you guys
Speaker 1: in a persistent chat? Is there an email chain or
Speaker 1: do you physically meet? And what if there's a split vote?
Speaker 1: What if not everybody agrees? How does that get worked out? Uh?
Speaker 1: Obviously the testment meeting they had some time in the
Speaker 1: last month or two was was probably zoom or on
Speaker 1: some other thing. And we've been using for committee meetings.
Speaker 1: We've been using a lot of technology over the last five, six,
Speaker 1: seven years. There are other committees that cover other indicas.
Speaker 1: So we had we had a committee that covered a
Speaker 1: lot of indicase in Europe that by necessity had half
Speaker 1: people in Europe and half in New York. So that
Speaker 1: was clearly electronic. But the Five Committee, um, yeah, up
Speaker 1: until COVID came along or up and certainly until I
Speaker 1: left um with everybody sat down in the same room.
Speaker 1: Every once in a while somebody would be on the
Speaker 1: phone because they happened to be traveling or something, but
Speaker 1: that was was unusual, rare. Um And how many people
Speaker 1: are on it it varied between I don't think it
Speaker 1: was ever less than six and I don't think it's
Speaker 1: ever more than ten. And it was just a question
Speaker 1: of practicality. Um, you know, you had twenty people. You
Speaker 1: can never get everybody together, and he had less than
Speaker 1: six if you lose somebody because they're on vacation, if
Speaker 1: you're really down law. So it was in that range.
Speaker 1: But there was no no fixed number. Remember, and how
Speaker 1: did you decide when you had different which it was?
Speaker 1: It basically a vote, It was at least typically a vote.
Speaker 1: Most of the most of the votes were aunanimous, are
Speaker 1: very close to it, and so on. There was sort
Speaker 1: of a tradition which I may be somewhat responsible for.
Speaker 1: If there was clear disagreement and the discussion was going
Speaker 1: on and on UM, my tendency would be to say
Speaker 1: all I don't want to go around the table, which
Speaker 1: meant everybody everyone had a chance to say that two
Speaker 1: cents for it. If you didn't want to say anything,
Speaker 1: you'd say I passed, or you could say I agree
Speaker 1: with the last guy or something like that. But we
Speaker 1: didn't want to have a situation where the next day
Speaker 1: somebody would start bete me, you didn't hear what I
Speaker 1: had to say. That was a requirement. Um, they go
Speaker 1: around the table usually would end up. Um, it's not
Speaker 1: get animous with a clear majority, it's not, And there
Speaker 1: was some people just had strong opinions. They knew they
Speaker 1: weren't going to carry it, but they liked the like
Speaker 1: the notes to say there was in the sending vote.
Speaker 1: So the fact that there's a committee with people making decisions,
Speaker 1: doesn't that kind of basically make the s and P
Speaker 1: five hundred and active fund. And I'll add that um
Speaker 1: uh Gunlock at double Line recently made that point as
Speaker 1: as well. So it's like it's not been said. Well
Speaker 1: the comment of like that that I like the best
Speaker 1: with the fellow, I think he's still in the game.
Speaker 1: Bill Miller, who ran a big fund for leg Mason
Speaker 1: with great performance, I mean the outperformed the index like
Speaker 1: about a thirteen years or something like that. So and
Speaker 1: he wrote to a shareholders one time that the best
Speaker 1: demonstration of the successive active management was the SPI. But
Speaker 1: who aren't trying to be active managers in the sense
Speaker 1: the committee is not. The goal was not top performance.
Speaker 1: The goal was it is an index that represents the
Speaker 1: market and meets the same statistical rules as the market,
Speaker 1: and and that kind of thing. It's it's not to
Speaker 1: beat the market and not to be a top performer.
Speaker 1: And judging a stock is not do we think the
Speaker 1: stock is gonna go up by at least ex percent
Speaker 1: over the next six months. Judging a stock is first
Speaker 1: does it meet the rules in terms of size and liquidity,
Speaker 1: profitability and this kind of stuff. And second, we'll get
Speaker 1: the index and look at the market. Where where is
Speaker 1: the index not quite online to the market? And will
Speaker 1: this not improvement that alignment? Plus a sort of looking
Speaker 1: at what's happening in the future, because the committee tracks
Speaker 1: announced mergers, so you know, the committee knows most of
Speaker 1: the big corporate actions six months into the future because
Speaker 1: the news is already out there and there's not clairvoyance.
Speaker 1: It because we read in the newspaper and we're gonna boom.
Speaker 1: The committee gets a little flak for being a human
Speaker 1: you know, human management on a passive fund, and it
Speaker 1: brings up the nothing is passive, which is a decent argument.
Speaker 1: I mean, there really is nothing truly passive unless you
Speaker 1: market kept wait, the whole entire market. Um that said,
Speaker 1: you know, with a Russell they did a rebalance or
Speaker 1: a reconstitution recently and beyond meat, which was this high
Speaker 1: flying stock, got added to the Russell value and everybody's like,
Speaker 1: how in the heck did that happened? And that's because
Speaker 1: they don't have a committee and the rules rule um,
Speaker 1: and beyond meat was in didn't have enough data to
Speaker 1: use its own PE ratio, so it got put into
Speaker 1: to the package goods average PE ratio. In other words,
Speaker 1: the sector it was in dictated where it got put
Speaker 1: and that's just the rule, and they could not change it,
Speaker 1: and thus beyond meat was a value stock for fire
Speaker 1: Russell standards. Is that why the committee exists? Is that
Speaker 1: why it was developed in the first place, to have
Speaker 1: that ability to avoid the rules doing something where it
Speaker 1: really doesn't make any sense. Yeah, I I don't know
Speaker 1: the full history of the committee. I mean, I know
Speaker 1: who the two or three couple of prior caremen to
Speaker 1: me were, and I that would take me back to
Speaker 1: probably very late sixties. They're only seventies. But how the
Speaker 1: committee came to me and I'm honestly don't know when
Speaker 1: we went this way. I wrote the first rules and
Speaker 1: it was to the years after we wrote him, before
Speaker 1: they were published. Yeah, there was there was tradition when
Speaker 1: there were that rule now the rules, uh, and that
Speaker 1: kind of thing. But I think in the beginning, it
Speaker 1: was just the sense that this was you had a
Speaker 1: bunch of people together for the same group every month
Speaker 1: or whatever, and this is this is what you do.
Speaker 1: And I want to talk a little bit about you
Speaker 1: started as the head of the committee and in I
Speaker 1: don't quote me, but Passive might have had a four
Speaker 1: percent market share. I mean it didn't really be Yeah,
Speaker 1: it was really tiny. I'm in the middle of reading
Speaker 1: Vogel's last book and um, he's talking about he had
Speaker 1: to wait thirty five years really for Passive to get big.
Speaker 1: You saw it go from really a tiny minority player
Speaker 1: to a gigantic force, And I just talk a little
Speaker 1: bit about the from an index perspective, seeing the funds
Speaker 1: tracking you get so big, and how did it? Could
Speaker 1: you feel the power of the index growing? Uh? From
Speaker 1: your perspective during that time, I did one thing in
Speaker 1: terms of the dates, and that is the the first
Speaker 1: U S E t F, the State STREETSTF. The big
Speaker 1: spider I think was UM and aren't of the growth
Speaker 1: of indexing and so on? Uh is E t F
Speaker 1: S and it's et s because before that it was
Speaker 1: all mutual funds. And you know, if you wanted to
Speaker 1: buy the Vanguard five hundred funds, which was big, even
Speaker 1: you had to go to Vanguard. You couldn't call up
Speaker 1: your broke wins I want to do this. He might
Speaker 1: tell you how to I probably wouldn't tell you how
Speaker 1: to go to Vanguard, who is the business, but he
Speaker 1: could see E t F suddenly meant that every broke
Speaker 1: in the United States could put you in it put
Speaker 1: you in an E t F. And I think that
Speaker 1: was part of the change. The other thing that drove
Speaker 1: it was in the late nineties in the tech boom,
Speaker 1: you had a period of months where the outperform of
Speaker 1: the actively managementual funding that I say which should not happen.
Speaker 1: I mean, that's it's just crazy. But what happened is
Speaker 1: the tex not as the tech bubble. It's quoted every month.
Speaker 1: They were the biggest games and eat the month they
Speaker 1: were bigger share of the index than last month because
Speaker 1: it's cap weighted and it's at an acceleration given built
Speaker 1: into the cap waiting, and that's helped put put everybody
Speaker 1: on the month, put the index on the map because
Speaker 1: peopleould say, what's this thing that beatcent of everybody? You know,
Speaker 1: it makes no sense and then they say, oh my gosh,
Speaker 1: it's just an index and it's cheat. Besides, but I
Speaker 1: you can't touch it without really complimenting or Jack bobble
Speaker 1: uh between the marketing they did and the pricing of
Speaker 1: their products, and most of all Jack Bogo himself. He
Speaker 1: was the most incredible pitchman you know, I've ever met.
Speaker 1: And I mean that is a great compliment because he
Speaker 1: was out there all the time beating his drum and
Speaker 1: tell you everybody, you know, buy an index fund and
Speaker 1: never sell um. And he did more were in the
Speaker 1: average investor into the United States than anybody probably in
Speaker 1: the modern history or something of that sort. So he
Speaker 1: deserves a huge amount of credit, uh for the whole
Speaker 1: index thing. But it did grow, and you know, gradual,
Speaker 1: I think, starting with the tech boom and then coming
Speaker 1: out of the tech bus when everybody thought, oh, you know,
Speaker 1: this is the terrible thing and nobody would buy an
Speaker 1: index fund ever again, and recession of two thousand one
Speaker 1: two thousand two, the indext did very respective and was
Speaker 1: often running at that point, and and so on. There
Speaker 1: was clearly growing news attention and the NBC looved to
Speaker 1: make excitement about it at the same time, and that
Speaker 1: helped down UM and it grew, and then indexing overall grew.
Speaker 1: Not only SMP expanded, and it's the eye expanded. Russell,
Speaker 1: which was somewhat different corporate structure at that time, began
Speaker 1: to expand very rapidly. So, David, it's interesting to hear you,
Speaker 1: you know, harken back to the tech boom in the nineties,
Speaker 1: because the situation that you just described sounds pretty similar
Speaker 1: to what we're seeing today. You know, you have a
Speaker 1: handful of huge tech stocks just leading the SMP higher,
Speaker 1: even without Tesla. And I'm curious whether you know, you
Speaker 1: see parallels between that period and now and whether it
Speaker 1: gives you any pause about market cap weighted indexes because
Speaker 1: again in the situation, it is just you know, five
Speaker 1: to seven stocks powering this index higher. Well, all right,
Speaker 1: one big difference between that and now is that pets
Speaker 1: dot Com certainly never made money. I mean now this
Speaker 1: time around, the companies are hugely profitable and and you
Speaker 1: know they their growth and their stock prices are are
Speaker 1: make more sense now than their equivalents of twenty years ago.
Speaker 1: Do some of them may still be overpriced Oosually the
Speaker 1: b ratios are pretty rich. Um. Well, one looks back
Speaker 1: the index goes through periods of one sector another being
Speaker 1: you know, being hugely taught right before the financial crisis,
Speaker 1: it will completely top eavy and financial stocks and so on. Um.
Speaker 1: I think there is some disconnect internal in the market today.
Speaker 1: And is what you mentioned that you've got a handful
Speaker 1: of stocks that very high pe ratios, very high, dragging
Speaker 1: the index up, and the rest of it doesn't do
Speaker 1: too much. I mean, I think it's nothing like the
Speaker 1: docks in the index. Um. You know, he certainly hadn't
Speaker 1: recovered from the you know, to the February highs or
Speaker 1: something like that. Um. And if you look compare the
Speaker 1: five hundred to the equated version of the five the
Speaker 1: cap weighted version is rather than substantially out performing. Now,
Speaker 1: there were a lot of periods from the time we
Speaker 1: started doing equated version, which about two thousand two, when
Speaker 1: equal weighted version did much better. And the equal equal
Speaker 1: weighted version is a planet value, which is a dirty
Speaker 1: word this this year. Mm hmm. And then I also
Speaker 1: wanted to sort of pickyback off of Eric's last question. Uh,
Speaker 1: you know, like he said in the intro, the SMP
Speaker 1: five hundred is sort of the sun around which we
Speaker 1: all have revolved, and um it obviously is a very
Speaker 1: powerful force. The the sort of speculation that a stock
Speaker 1: might get added or removed causes huge moves in the
Speaker 1: stock price. And just this month we've seen the the
Speaker 1: SEC look into an S ANDP employee for potential insider trading.
Speaker 1: He might have tipped his friend off that maybe he
Speaker 1: should put on some options ahead of the rebalance. I'm curious,
Speaker 1: you know, thinking about the power of indexes and their
Speaker 1: ability to move the stock market. What do you think
Speaker 1: of this trend and where do you see it going?
Speaker 1: I guess it, you know, two or three comments in
Speaker 1: terms of the power of indices and so on, UM
Speaker 1: and moving stocks. What happens that stock is added to
Speaker 1: the What art studies and other studies should constantly show
Speaker 1: is that you know, if it stock gets announced and
Speaker 1: then five days later it actually goes in the index
Speaker 1: to the five days the announcement period. If the stock moved,
Speaker 1: that would take up three or four percent over that
Speaker 1: five day period, and then it would give it back
Speaker 1: in the next two or three weeks. So if you
Speaker 1: looked at in a month, two months later, it had
Speaker 1: given back this this game, there was no sort of
Speaker 1: permanent game or something like that. If you wanted to
Speaker 1: play that, you options were probably the logical thing to do.
Speaker 1: UM we were, or I was always concerned about. It
Speaker 1: was a lasting game where screwing twisting the stock market somehow,
Speaker 1: and I never saw any evidence of that. And the
Speaker 1: other aspect in terms of the you know, the inside
Speaker 1: information aspect, which I think is what you're hinting at.
Speaker 1: I don't know anything other than one I might have
Speaker 1: read in the newspaper about the current events. I passed
Speaker 1: on that because I don't have anything about to say
Speaker 1: about it. What I will say is that, uh, everybody
Speaker 1: involved in the indsease and SNP is an organization very
Speaker 1: very aware of the sensitivity of the data when it
Speaker 1: was still confidential, when it hadn't been announced. There were
Speaker 1: procedures really to protect that in the sense that announcements
Speaker 1: were made only after the market clothes that they were
Speaker 1: gonna be made. It was always the same time of day,
Speaker 1: There was no there was no pre announcement or hint
Speaker 1: or anything like that. All the people involved in working
Speaker 1: in the enduites were subject to compliance rules and restrictions.
Speaker 1: None of us were permitted the own single stocks. In
Speaker 1: the fact, that was one point when UM I unloaded
Speaker 1: a whole bunch a number of stocks, and some of
Speaker 1: which had probably helped for fifteen twenty years and had
Speaker 1: inherited or something like that. My wife had to do
Speaker 1: the same thing with a portfolio. Um they left me,
Speaker 1: they gave me SMP stock. They didn't make me self
Speaker 1: had But other than that, there were restrictions and brokerage
Speaker 1: accounts alsent duplicant statements to SMP and and you guys
Speaker 1: are off familiar with those rules. And that's truly every
Speaker 1: every bank and and probably every journalist organization. And I
Speaker 1: just want to comment real quick on a lot of
Speaker 1: the attacks on passive. One of them is, you know,
Speaker 1: once you get into the SMPF under you can relax.
Speaker 1: But I think to your point, yeah, there might be
Speaker 1: some buying ahead of it, but stocks get killed after
Speaker 1: they're in there, like g and Macy's got sold off
Speaker 1: and then they got kicked out. So I think just
Speaker 1: looking at some of those cases, active players are in control.
Speaker 1: If anything, the indexes is reacting to that. One of
Speaker 1: the hardest things on how to when to get rid
Speaker 1: of a stock, when to drop it. From the committee
Speaker 1: point of view, maybe I'm told that active managers have
Speaker 1: a bigger problem. They fall in love with the stocks.
Speaker 1: I don't think it falls in love with them, but
Speaker 1: it is very difficult. Um, you know, if it just
Speaker 1: missed the rule to get in by a little, you're
Speaker 1: gonna keep it for a while. Or how big is
Speaker 1: too big or something like that. And some of them
Speaker 1: come along for other reasons. Um, you've got a big
Speaker 1: company index doing a spinoff, and you look at the spinoff,
Speaker 1: what's gonna be spun and you say that the spin
Speaker 1: it's gonna be an SMP You know that both the
Speaker 1: parent and spin should be in the index. So here's
Speaker 1: the choice. Um we announced that we're not adding the spin,
Speaker 1: and then we come back a couple of months later
Speaker 1: and say, oh, we changed my and put it in,
Speaker 1: but we turned everybody's account, which is not a nice
Speaker 1: thing to do, or we had to spend the same time.
Speaker 1: It's it's been happens right away, it goes in, but
Speaker 1: we don't want to have five companies in the index.
Speaker 1: That's not the name, So we got to chuck somebody out.
Speaker 1: So at that point, we're gonna go and book at
Speaker 1: the the bottom fifteen twenty names and see who's consistently
Speaker 1: sinking and and there's our guy in and so um
Speaker 1: so some of the some of the eggs are sort
Speaker 1: of easy. Some of the eggs are very difficult. You know,
Speaker 1: he was once. He was once bigger than any of
Speaker 1: the texts in the United States are than today's text
Speaker 1: and you know, when do you they are? That's so
Speaker 1: how do you uh, you sit there and you agonize
Speaker 1: over the you know, the dowb the Committee for the Dow,
Speaker 1: which I also chared, which SMP now runs, has run
Speaker 1: since twelve. It's harder in the Dow. You know, sometimes
Speaker 1: that five hundred you throw out a sock, everybody forgot
Speaker 1: it was still around. Don't get that opportunity in the Dow.
Speaker 1: You're dropping the stock. Everybody knows it right away. I
Speaker 1: mean some people can recite all thirty dames in the Dow. Uh,
Speaker 1: nobody can recite all five undred days. And speaking of
Speaker 1: things not really being passive, the Dow uses price waiting. Um,
Speaker 1: you know, I get it. The index was designed, you know,
Speaker 1: back when Grover Cleveland was president, and it wasn't really
Speaker 1: thought to be an investment tool. But the d i
Speaker 1: A has I don't know, a fifty billion in it.
Speaker 1: The media keeps quoting it. But price waiting just seems
Speaker 1: so absurd. You're just waiting it based on the price
Speaker 1: it is, so Apple has a stock split goes from
Speaker 1: the biggest waiting by far to like number seventeen. Nothing
Speaker 1: really changed about the value. So I mean, when you
Speaker 1: were running the doubt, it just sort of marvel at
Speaker 1: how I don't know, weird that system is and why
Speaker 1: the media still is like obsessed with the Dow. I't
Speaker 1: we gonna ask you the next question that I don't
Speaker 1: have a good answer, so don't ask we We talked
Speaker 1: a lot about other versions. You know, well, we took
Speaker 1: it on two. We took for a lot about all
Speaker 1: kinds of changes it was. Now. I think a dividend
Speaker 1: based index is based on the down, which is probably
Speaker 1: waited by dividend dividend yield. I think that we created,
Speaker 1: we used it. Wait and it's an analyst at SMP
Speaker 1: was very much still there. In fact, you probably don't
Speaker 1: talk to him all the time about data. Uh he
Speaker 1: set up and runs the cap weighted version that the
Speaker 1: DOW was sort of under the table or something like that.
Speaker 1: And but all of us, including myself, you know, we
Speaker 1: used to call up say, you know we sent me
Speaker 1: that day. I want to do some stuff with it,
Speaker 1: the way around with it and that kind of thing.
Speaker 1: But um, I don't think it's gonna change. There's one
Speaker 1: other price weighted index I know of, and that's the
Speaker 1: deck to to five. And I'm sure there a lot
Speaker 1: of people in Tokyo who love it, but mostly they
Speaker 1: love the topics which is cap weighted and done right.
Speaker 1: You're such an index guy, and I'm wondering do you
Speaker 1: look at other indices q q Q for example, and
Speaker 1: the and NASAC one hundred and how how does that
Speaker 1: compete and complement. Uh SNP five hundred's sort of a
Speaker 1: measure of American companies. The point that or the I
Speaker 1: guess the cues more than even though the cues is
Speaker 1: the the e T s detectively. That's really a sector
Speaker 1: oriented index or a sector focused index. You know, we
Speaker 1: slice the five hundred into eleven sectors and do in
Speaker 1: the season all eleven and all this kind of stuff too.
Speaker 1: And the only thing I would say is that if
Speaker 1: somebody came to me and said, I'm um, have a
Speaker 1: one Indeck portfolio. I'm in the cues, I'd say, you know,
Speaker 1: I don't think you really have the market. You've got
Speaker 1: something else that's got to be good. One inde portfolio,
Speaker 1: the five hundred, I think you have the market. You've
Speaker 1: done so, David, I want to quickly ask you one
Speaker 1: more question on self indexing. UH. You know e t
Speaker 1: f s under huge price pressure. We've seen some of
Speaker 1: them come out. It hasn't really taken off yet, but
Speaker 1: we have seen some success stories such as GSLC. It's huge.
Speaker 1: We featured it on Trillions a few weeks ago. UM.
Speaker 1: But other than that, you know, you're still seeing big
Speaker 1: brand index makers really dominating in the E T F world.
Speaker 1: But I'm curious, on a longer term time frame, do
Speaker 1: you think the SMP and the M s c I,
Speaker 1: for example, could eventually lose business to self indexing. Well,
Speaker 1: I think there are two or three things that show
Speaker 1: up that really get somewhat restricted limits self indexing and
Speaker 1: that kind of thing. One thing, it's a huge amount
Speaker 1: of brand management. It's in the in all of this.
Speaker 1: You know, I'd love to say that five hundred is
Speaker 1: so out there and so widely because you know, they
Speaker 1: think they think we're all geniuses, we were all geniuses
Speaker 1: or something like that. But it's supporting the brand, managing
Speaker 1: the brand, keeping the brand out there, making sure people
Speaker 1: have a lot of respect and faith in the brand.
Speaker 1: And that's the same thing with any other products. So
Speaker 1: somebody comes along, Vanguard has an incredible brand name, and
Speaker 1: Vanguard has other than the Vanguard five hundred. You gotta
Speaker 1: really dig to find out who's doing the index or
Speaker 1: where the index came from. And you know, and they
Speaker 1: have a brand that has the power equivalent to you know,
Speaker 1: SNP or mc ir or foot see or somebody else. Uh,
Speaker 1: But there are very few of those who's got a
Speaker 1: brand that that kind of that kind of recognition and
Speaker 1: that kind of crown. So so if you're, um, you know,
Speaker 1: three guys in a garage or whatever it is, putting
Speaker 1: together in an E T f UM, you're gonna have
Speaker 1: a you gotta have a brand if you wanna get noticed.
Speaker 1: You call it the you know, west Side Garage Index,
Speaker 1: and uh, it's not gonna fly, so right away that
Speaker 1: the brand barrier. The second thing is scale economies. You know,
Speaker 1: if you're gonna camplate one index and trying it's day
Speaker 1: I have five socks in it. It's somebody overhead, you know,
Speaker 1: a two or four guys tracking stocks, and a couple
Speaker 1: of guys running the computer and the hardware and software
Speaker 1: and everything. Advertize that of course one index you're operating
Speaker 1: expense is gonna be you know, two percent, which you're
Speaker 1: out of the market at that point. Yeah, S ANDP.
Speaker 1: I don't know how many industries we calculate. I don't
Speaker 1: think anybody could figure it out, but it was clearly
Speaker 1: a six figure something every Yeah, every market marketing in
Speaker 1: the world, that every equity market the U S would
Speaker 1: let you do business in. We were in, uh, every
Speaker 1: stock with a market cap over about ten ten, fifteen,
Speaker 1: twenty million dollars we were tracking, so that scanal economies
Speaker 1: were mind blowing. You know, we calculated more indusseries every
Speaker 1: night than almost anybody else. So obviously the scanal economy
Speaker 1: is were great. So that's gonna mean that self indexing.
Speaker 1: Unless you're biggest Vanguard or something like that, it's cheaper
Speaker 1: to come to SMP or m s c I or
Speaker 1: Russell and say will you run this for it? And
Speaker 1: there's a big custom index business. The third reason Nick
Speaker 1: stands out is UM and it's really because of in
Speaker 1: mixed business. And they really started with investment banks where
Speaker 1: they took up some kind of rage index and they
Speaker 1: write options on it and they'd sell the options. And
Speaker 1: so here you've got a product that you know the
Speaker 1: index is more than six, your option pays off. You're
Speaker 1: gonna trust your friendly investment banker to tell you it
Speaker 1: was only five point nine too at the settlement day
Speaker 1: or not. Well, they're all honest, but I wouldn't trust
Speaker 1: to me either. If you go to an independent group,
Speaker 1: my guest MP or or or the rest of us
Speaker 1: and say, um, you know calculated and so we do,
Speaker 1: and they'll say calculation by standard fors and that's it,
Speaker 1: you know all that I think it limits self indexing. Um.
Speaker 1: You know, the big guys like Vanguard are still gonna
Speaker 1: be interested in it. And um, Vanguard, black Rock, State
Speaker 1: Street maybe in bastcumb maybe if you want. It created
Speaker 1: a price war in this business a few years ago. Um,
Speaker 1: driving down et F fees. You know, self indexing isn't
Speaker 1: worth that much because they've driven down everybody else's fees. Um. Okay,
Speaker 1: next question, um, which is one that I often ask
Speaker 1: on trillions to close this out, but I have a
Speaker 1: better kicker today. But what is your favorite et F tkicker?
Speaker 1: My favorite et F ticker probably then by the big
Speaker 1: Spider because the first of course it would be okay.
Speaker 1: So now now I have to ask a new kicker
Speaker 1: on behalf of my friend Eric. How does Eric get
Speaker 1: on the committee? Well, first of all, you have to
Speaker 1: remember you had to be employed by SMP Global. You
Speaker 1: had to work work in the index in the index business,
Speaker 1: you know, SMP Dow Jones indusease the division. Um. But
Speaker 1: more than that, you probably have to have been doing
Speaker 1: it for at least five, six, seven, eight years or
Speaker 1: something of that sort. And I don't remember the exact details,
Speaker 1: but like any organization, there were standard titles and managing director,
Speaker 1: director so on and some way, and there was there
Speaker 1: was a minimum title that that probably takes another ten years.
Speaker 1: Committee you had to have that title. That was a rule.
Speaker 1: And then you come to work one day and open
Speaker 1: your open your locker and there's like a little pink
Speaker 1: slip waiting for you, and that's when you know you're in. No,
Speaker 1: it's it's not like the movies, is it. You get
Speaker 1: you get probably you get a phone call from the
Speaker 1: chairman and then then you and then an email that's
Speaker 1: sent around to the group that works for the index
Speaker 1: calculation group. I grew a better term, um wopen doing
Speaker 1: this all the time, and all who were restricted in
Speaker 1: in a separate point wing in the office and selling
Speaker 1: its so forth, an email will go around to all
Speaker 1: of them saying, um, Joe Smith has been added to
Speaker 1: the five committee and and then everybody starts kissing your
Speaker 1: butter on the office. Or no, actually, I would say
Speaker 1: all of the CEOs of the three thousand stocks that
Speaker 1: aren't in the SMP five hundreds start being a lot nicer. Yeah, well,
Speaker 1: there's a rule not to release the names other than
Speaker 1: the chare person's name. And I think today, if I
Speaker 1: understand it, there's a rule that not even to release
Speaker 1: the name of the care It's fascinating anyway, I really
Speaker 1: appreciate the insight. Um, we're definitely I don't know. I
Speaker 1: mean the fact that I live, eat, and breathe this stuff.
Speaker 1: And I couldn't tell you one member it's this weird.
Speaker 1: It's just the most important were David Blitzer. Thanks so
Speaker 1: much for joining us on Trillions, High pleasures. Thanks for
Speaker 1: listening to Trillions until next time. You can find us
Speaker 1: on the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify,
Speaker 1: and wherever else you'd like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,
Speaker 1: He's at Eric fall Tunas, and you can find Katie
Speaker 1: at kay Grifles. This episode of Trillions was produced by
Speaker 1: Magnus and Rickson. Francesca Levy is the head of Bloomberg Podcast.
Speaker 1: Bye