John Prestbo, formerly editor of Dow Jones Indexes and instrumental in the index provider's founding, chatted with the Journal of Indexes recently and offered his views on the current state of the indexing industry.
Journal of Indexes: How has indexing changed since you were helping to get Dow Jones Indexes off the ground?
John Prestbo (Prestbo): It has become a lot more populated: There's more competition, and there are also more users of index products. It's grown considerably. Another change is that when we started Dow Jones Indexes, the ETF space was primarily basic benchmark indexes. But now it's increasingly diverse with leveraged and inverse and strategy and active. There are a lot more products out there for investors to choose from.
JOI: Do you think the increasing diversity in the index industry is actually leading to stronger, more useful products for investors in general?
Prestbo: Yes; the thing about innovation is that not everything is a home run in terms of gathering assets or in terms of simple utility in an investment program. But ideas need to be spawned freely and tried out, and if they don't work, you shut them down and go on to something else. We've seen a lot more of that lately, too. Everything was treasured and precious in the beginning, and now it's "spit them out and see what happens."
Sometimes, a little more thought could be given to the "spitting out" part, but I'd rather have it that way than restricted thinking.
JOI: Is the evolution of the ETF industry driving the index industry's growth, or is the index industry driving the ETF industry's growth?
Prestbo: The ETF industry has been the driver, because that's where the money is—or at least that's where the growing amounts of money are. Obviously, the vast bulk is still in the mutual funds, but ETFs are growing strongly— and the SEC requirement in the beginning that ETFs be based on indexes was clearly a boon for the index business. That is partly why we've seen a reinvigorated bunch of index providers and also why we see all this creativity on the index design front.
JOI: What are the index innovations in the past years that you think are the most useful or the most interesting?
Prestbo: Bringing indexing to commodities was a great innovation. I know that the GSCI index goes back quite a ways, but it didn't meet with instant success. The ETF boom kind of brought commodity indexing to the forefront and made access to that market particularly easy for a lot of investors. They basically could trade their exposure to commodities like a stock in an ETF vehicle.
Currencies are another asset class that has become much more available through stocklike treatment, which is really what most investors need in order to handle a new asset class. Real estate—same thing. The asset class innovation was a good thing, I think, for investors as a whole. It opened up avenues that didn't exist before.
More recently, we've had strategy indexes. Now, some of those were available very early on, because growth and value are strategies that come to us from the good old days. But we've moved beyond that now to indexes that take you in and out of the market depending on what's happening with volatility or some other factor. We've got target-date indexes that move people through their life span with investing in a mix of markets: stocks, bonds and whatever. Those are all great ideas.
Now we're into an era where there's all sorts of convolutions. Just about every index provider has offerings in this arena—volatility control and who knows what's coming down the pike? In fact, Dow Jones just put out two index families from professional investors that have developed strategies and written books about them, and now, put them into index form. We're pushing the envelope toward rules-based active investing. Will this be good for everybody? Absolutely not, but it's good for some people. A market exists for all kinds of investment approaches, but they won't necessarily become big blockbusters.