Craig Lazzara is a managing director in the core product management group at S&P Dow Jones Indices (S&P DJI). His responsibilities focus on providing thought leadership and educational outreach for S&P DJI’s core, alternative beta, and style indexes globally. Craig is also a speaker at the upcoming Exchange conference in Miami in early February. I caught up with him to learn more about his panel and to celebrate a key industry milestone.
Todd Rosenbluth: Craig, you are part of a panel at Exchange on the future of index innovation. But before we look ahead, let’s briefly recap the past. The first U.S. ETF, tracking the S&P 500 Index, just had its 30th birthday. Can you talk about the role the index played in the ETF industry in the last three decades?
Craig Lazzara: Your question reminds me of a jazz musician who was asked about improvisation and said, “You can’t improvise on nothing; you have to improvise on something.” Analogously, you can’t build an ETF on nothing; you have to build it on something. I don’t think it’s too much to say that the ETF industry could not have started and would not exist without an index infrastructure to support it. Beginning with the S&P 500, ETFs made it apparent that investors could capture the return of the market in a way that was transparent, flexible, convenient, and cheap. Of course, in the last 30 years, the relationship between the index industry and ETFs has become reciprocal, as ETF usage has spurred the development of indices designed to capture patterns of return or characteristics that investors find attractive.
Rosenbluth: We now have ETFs tracking various segments of the S&P 500 Index, like just the technology sector or companies with the strongest value attributes or even ESG versions. I know you and the team likely love all of your children equally, but what should advisors know about them that they likely do not appreciate?
Lazzara: This reminds me that indices existed long before there were index funds. The S&P 500 assumed its current form in 1957, the first index funds launched in the early 1970s, and as you mentioned, ETFs in the U.S. are just 30 years old. Before there were index funds, indices were used to benchmark active portfolios, and in fact, it was the inability of most active portfolios to outperform that caused innovators to launch index funds 50 years ago. But what’s true of the market as a whole is also true of segments of the market. An advisor who likes the technology sector can and should evaluate the performance of active tech-centric managers against a technology index or ETF. The same is true for advisors interested in value, or ESG, or any other attribute we can conjure up. Think of passive vehicles — ETFs — as the default position, and only use active management if good evidence convinces you that it is likely to outperform.
Rosenbluth: You recently published a piece, “Style Chicken or Sectoral Egg,” saying that index exposures are not independent. What do you mean by that?
Lazzara: The article was an outgrowth of the factor dashboard that my colleague Fei Mei Chan and I produce monthly. We noticed, when we wrote the December dashboard, that the difference between a factor index’s value and growth scores was a good predictor of its relative performance in 2022. We also noticed that the Information Technology sector, which is the largest sector in the S&P 500, was one of 2022’s worst performers. It turns out that the degree to which a factor index underweighted technology was a slightly better predictor of 2022 performance than the difference in style scores. But of course, these things are related: Technology at the beginning of 2022 had the highest-weighted average growth score and the lowest-weighted average value score of any sector, so the obvious question is, did technology underperform because it was growthy and expensive, or did growth underperform and value outperform because of their technology over- and underweights?
The question may be obvious, but the answer is not, and I don’t think there’s a definitive answer to be had. What I suggested in the blog was that in 2022, tech was more important to style than style was to tech. But that’s a particular observation, not a general conclusion. At different times and with different sectors, you might get a different answer.
Rosenbluth: At Exchange, you are going to be talking about what’s next for indexing. Can you give us a taste of what the audience will hear during the session?
Lazarra: You’ve heard me use the word “indicize” before, and I think the audience will hear it in Florida. What I mean by “indicize” is to deliver in passive form a pattern of returns that you formerly had to pay active fees to get. The first index funds and ETFs indicized the U.S. equity market — they made it possible to have access to U.S. equities without having to pay an active manager’s fee or risk underperforming because of his stock selection. As ETFs evolved, they applied to other national markets, to sectors and industries, to bonds and commodities, and to factors like value or low volatility. The future of indexing involves indicizing more patterns of returns with more granularity for the client.
Rosenbluth: Lastly, I’m going to be in a suit and no tie when I see you in Miami Florida, but will you be a wearing your traditional bowtie on stage?
Lazzara: Of course! If I didn’t wear a bow tie, no one would recognize me.
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