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The S&P 500 Index and the Dow Jones Industrial Average (DJIA) have a long and proud history with the DJIA celebrating its 125th anniversary late this spring. At the time, this was a ground break innovation and today, investors all over the world still rely on this index as a barometer of U.S. and global economic health. Dan Draper, CFA, chief executive officer at S&P Dow Jones Indices joined CFA Society Chicago on July 15, 2021, for a Fireside Chat and Q&A session. Garrett Glawe, CFA, managing director, head of U.S. Equity Indices at S&P Dow Jones Indices moderated this engaging conversation focused on the evolution of the indexing industry, financial innovation, and trends currently shaping global markets.

Draper opened the conversation by discussing lessons learned from the global pandemic and touching on corporate culture. We have all been affected by “Zoom fatigue” and employers have had varying approaches to dealing with it. Draper explained S&P Dow Jones Indices’ people first approach helps employees focus on health and wellness and includes a reprieve from meetings on Fridays, giving employees back time for engaging in projects that require deep thinking and concentration.

Next, he commented on how the global impact and challenge of the pandemic have transformed the industry and that embracing and emphasizing ethics is something that is much needed to advance the industry. CFA charterholders and candidates have a strong commitment to ethics and ethical practices. Both Draper and Glawe affirmed the value of the CFA charter and the program for its ethics, values and resiliency it builds. With 422 charterholders located around the world, S&P Dow Jones Indices collaborates with CFA Institute and local societies for joint research and volunteer activities.

Pivoting to the business model, Draper emphasized that their independency is critical as an index provider for which the investment community builds confidence. The firm is structured with a 27% minority ownership by CME and a 73% ownership by S&P Global. Core business functions include:

1. Data related with benchmarks that clients use.
2. Intellectual property where clients create investment vehicles based on indexes that are licensed
3. Derivatives created and offered through working with the CME, investment banks, futures exchanges or over the counter.

Looking forward, growth opportunities for the business include passive income, ESG/sustainability, crypto currency and active with thematic and factor strategies. The merger between S&P Global and ISH Markit announced in late 2020 is pending regulatory approval and could create a multi-asset one-stop shop.

What is driving index-based investing? Draper commented that this is an increasing secular theme that is attractive to savers because of lower costs and increasing transparency. Besides, active managers have had a hard time outperforming and in general, scorecards underscore their underperformance. It is hard to argue with $320B invested in passive strategies. Bringing a transparent philosophy and independence boosts investor confidence while remaining relevant. Sure, there are low barriers to entry for index providers, but consistency and establishing scale, size and investor trust is hard to accomplish.

Thinking about core US equity and global equity, the S&P 500 index is undoubtedly the best known of benchmark indexes. From it, other S&P-based indexes focused on factors and ESG can and have been created. This expands to global arena for developed and emerging countries and to thematic products such as investment factors based on the Fama-French research. Combining factors in a unique way is one way S&P Dow Jones Indices differentiates itself. Many ETFs track factor-based indices with the idea being to harvest an investment factor over a long-term horizon. Thinking about these from an investor prospective, products based on thematic indices are often used by asset allocators to provide portfolio diversification.

Talking about ESG investing, Draper emphasized that S&P Dow Jones Indices has a track record that goes back to 1999 and leverages the “E” part as an advantage. The firm provides benchmarks and works with fiduciaries to bring investible products to life with exchanges providing liquidity in the ecosystem. A frequently asked question is if ESG is a fad or a growth trend? Per Draper, leading benchmarks are still being established and the US ESG market is early in a 9-inning game despite policy maker and news headlines.

Commenting on crypto currency, Draper emphasized there is a growing need for benchmarks in this non-traditional area for potential investment. S&P Dow Jones Indices has launched three crypto-based indices based on Bitcoin, Ethereum and a market-cap weighted index that tracks both.

The GICS framework is an institution in our industry and is used by indices to assign companies to industries, sub-industries, groups and sectors. Since we are now in the 4th industrial revolution, bringing the digital world to the GICS structure is about evolving GICS and better identifying artificial intelligence.

Draper closed the discussion by commenting on what career advice he would offer to newer industry professionals. In his words, the CFA charter is a great qualification and well worth the effort and time. It encourages a strong responsibility to leave a legacy by encouraging a responsibility in the investment community. Those who are earlier in their careers should leverage the CFA network.

Draper has vast senior leadership experience in the ETF industry and corresponding insights. Notable discussion from the question and answer session was about the motivation for recent mutual fund to ETF conversation. There is more consideration for the ETF wrapper. In addition to obvious transparency that ETF’s offer, reasons for conversion could include a tax element unique to the US. Trading activity inside a mutual fund may create a taxable event for all shareholders whereas ETFs create and redeem shares with “in-kind” transactions. This trading does not create a taxable event for shareholders.

Thank you Dan and Garret! Maybe future generations can look forward to celebrating the crypto currency indices created by S&P Dow Jones Indices.

 

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