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.
I was talking with a former Nasdaq employee and who said that
initially Nasdaq hadn't moved that aggressively into the ETF
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
Are there certain parts of the world where you have better
penetration than others?
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.
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
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.
So does your size enable you to offer a cheaper price than other
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
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.
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.
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."
So these low-volatility funds and value funds help you with your
larger index tracking funds?
Absolutely; they help you understand what you are seeing in the
bigger broader index.
You were talking about blended funds earlier. What blended funds
were you referring to?
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
You're saying a blended index really gives you a better return?
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
It's all about basis points. Going back to John Bogle:Basis
points matter over time.
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