The S&P Dow Jones & S&P 500: A Brief History (EP.54)

Episode Summary

Executive Summary: Dr. David Blitzer traced the evolution of modern indexing from a niche institutional tool to a mainstream investing default, explaining SP Dow Jones Indices’ role as an index publisher rather than an asset manager. He discussed ETF growth, index construction rules, active vs passive boundaries, factor and equal-weight approaches, Canada’s distinct market structure, and why transparent, low-cost indexing has been so hard for active managers to consistently beat.

Main Topics: The rise of modern indexing (Priority: 5/5): Blitzer described how indexing shifted from a little-used institutional tool in the early 1980s to a mass-market investing approach, accelerated by futures, ETFs, online brokerage access, and retirement-plan changes. SP Dow Jones’ role as an index provider (Priority: 5/5): He clarified that SP designs, calculates, and maintains indices, while firms like Vanguard and BlackRock license those indices to build funds that track them. Index construction and committee governance (Priority: 5/5): Blitzer explained how the index committee works, emphasizing rules-based decisions, corporate-action handling, profitability screens, liquidity, and the objective of representing the market rather than picking winners. Why indexing has outperformed many active managers (Priority: 5/5): He attributed index investing’s success to low fees, broad market exposure, and the concentration of returns in a few winning stocks, which makes stock selection difficult for active managers. Active, passive, and factor-based investing (Priority: 4/5): He rejected the term 'passive' in favor of 'intelligent investing,' said factor strategies sit on a continuum toward more active choices, and argued factor investing is likely here to stay. Canadian market structure and index design (Priority: 4/5): He discussed how Canada’s smaller, sector-concentrated market leads to different diversification challenges, with benchmark design reflecting the market’s financial and resource tilt. The future of indexing and market impact (Priority: 4/5): Blitzer said indexing is unlikely to become the entire market, but it has already transformed investing by improving access, lowering costs, and helping savers invest for retirement.

Key Arguments: ETFs were the biggest catalyst for mainstream indexing because they made index exposure easy to buy through any broker, not just the fund manufacturer. Index providers like SP do not manage money; they publish rules and data, while asset managers license the index and create investable products around it. The SP 500’s profitability screen and other construction rules are intentional and can improve performance relative to comparable benchmarks without turning the index into active management. Active managers struggle because market returns are highly skewed: a small number of stocks drive much of the index’s long-run performance. Low costs matter enormously; even small fee differences can overwhelm active strategies over time. Equal-weight strategies benefit from systematically overweighting smaller and often value-tilted stocks, which can boost long-term returns relative to cap-weighting. Factor investing is a continuum away from pure market-cap indexing, but it remains rules-based and more systematic than discretionary stock picking. Index transparency may actually help skilled active managers by making some market behavior more predictable, though indexing will remain a large force. For many retail investors, the best default is a simple, low-cost, market-cap-weighted index fund unless they have the expertise, time, or interest to do more. Canada’s market is structurally different from the U.S., so diversification and benchmark design require more attention to sector concentration and market size.

Data Points: Years at SP: Joined in 1982 - Blitzer said he joined SP about six weeks after futures trading and the SP 500 began trading. Modern era start of indexing: 1982 - He characterized 1982 as the beginning of the modern era of index investing. ETF creation in the U.S.: About 1993 - He said ETFs were created in the early 1990s but only took off in the early 2000s. Technology boom impact: 95% - He recalled periods in the 1990s when the SP 500 outperformed roughly 95% of mutual funds. Small-cap 600 vs Russell 2000: Profit screen vs no profit screen - He contrasted the SP Small Cap 600’s profitability requirement with Russell 2000’s lack of one. Index committee size: Typically 6-10 members - He said the committee has usually been in this range and each member gets one vote. Corporate action timing: 2-5 days in advance - He noted that SP 500 changes are announced a few days before implementation. Merger tracking horizon: 6-9 months - He said the committee often knows mergers that will close within this period. Canadian composite size: Around 225 stocks - He described the SP TSX Composite as the principal Canadian benchmark for many investors. SP TSX 60: 60 stocks - He described it as an analog to the SP 500, but more concentrated. Canada index tail rule: Smallest stock ≤ 1.5% of total weight - He noted this unusual rule for the Canadian composite. SP 500 weight in tech during boom: About 33-34% - He said tech weighting reached roughly one-third during the dot-com era. Dow Jones history: 1896 - He referenced the Dow’s long history and its continuing use of a price-weighted methodology. SP 500 history: 1957 - He said the modern SP 500 was created in 1957. SP 500 historical roots: 1926 - He noted that the broader lineage of the SP 500 goes back to 1926. SP company size in 1982: Fewer than 400 employees in the whole company - He used this to illustrate how small the index business was early on. Zero-to-little indexing era: Early 1980s - He emphasized that index assets were minimal before futures and ETFs accelerated adoption. Federal funds rate: About 14% - He described the macro environment when he joined SP in 1982. Inflation rate: About 13.5% - He used this to explain why stock investing was unattractive in the early 1980s.

Pivotal Quotes: "We don't run in investment funds. If you send us a check, we're going to send it back on cash because we don't do that business." — Dr. David Blitzer: Explaining SP Dow Jones’ role as an index provider rather than a fund manager. "I used to try and call it intelligent investing." — Dr. David Blitzer: His preferred alternative to the term 'passive investing'. "If you own the index, you own all of them." — Dr. David Blitzer: Discussing why broad index exposure captures the small number of extreme winners that drive returns.

Implications: Listeners should view indexing as a transparent, low-cost system for capturing market returns, not a lazy default. The episode suggests factor and equal-weight approaches can add nuance, but disciplined rules and cost control remain the strongest edge for most investors.