portfolio
Index Merger:
New Landscape
The S&P/Dow Jones merger pits the
indexing giant against a changing
marketplace. Here are a few ways
advisors could be affected.
By Joseph Lisanti
The owners of the two big- gest names in U.S. market benchmarksmergedtoform S&P Dow Jones Indices over
the summer. The resulting giant publishes 830,000 indexes daily, including the S&P 500 and the Dow — as
well as benchmarks for commodities,
foreign equities, the U.S. housing market, health care costs, consumer credit
default rates and more.
In fact, SPDJI publishes indexes covering just about anything that advisors
and their clients would want to invest
in, track, compare their performance
to or hedge against. “In terms of asset
classes, we think we have the broadest
product array,” says Alex Matturri, CEO
of S&P Dow Jones Indices.
So will that product heft translate
into pricing dominance? Because
indexes dominate the ETF industry
— less than 0.6% of assets held in U.S.
exchange-traded funds are in actively
managed products — advisors could find
that the index-based ETFs they use cost
more. The merger could also change the
landscape for smaller index firms that
compete with the benchmarking giant.
What exactly will the merger mean for
investors and their advisors?
One of the first concrete consequences of the deal was a shift in who
determines the Dow’s composition.
For most of the 116-year history of
the Dow, the editors of The Wall Street
Journal made decisions about alterations in its composition. That changed
in September, though: When Kraft
exited the Dow, to be replaced by Unit-edHealth Group, the move was made
by an S&P Dow Jones committee that
includes a sole editorial representative
of The Journal.
One reason for that: In many
respects, the joining of the Dow and
S&P index businesses was more a
takeover than a merger. McGraw-Hill,
S&P’s parent, owns 73% of the joint
venture. Futures exchange operator
CME Group, which bought controlling
interest in the Dow Jones index operations in 2010, holds 24.4%, and News
Corp., owner of Dow Jones and The
Wall Street Journal, owns the remaining 2.6%.
MONOPOLY FEARS
A few observers suggested that any
monopolistic fears are overblown.
“There are those who could worry that
S&P Dow Jones will now have greater
pricing power,” says Steven Schoenfeld,
managing partner of Global Index Strat-
egies, a consulting firm focused on the
financial services industry. Still, Schoen-
feld notes, the new giant “still has a lot of
competitors — among them MSCI, FTSE,
Russell and, in Europe, Stoxx.”
Schoenfeld is not alone in thinking
that the merged organization, despite
its size and scope, will not overrun the
index world. “S&P doesn’t really have
any notable dominance once you get
outside that S&P 500 index,” says Paul
Justice, director of ETF research at
Morningstar. Justice notes that MSCI
overshadows SPDJI when it comes to
indexes of foreign markets, both devel-
oped and emerging, as well individual
country indexes in both those areas.
On the ground, too, there seems to be
little worry about the combined strength
of the S&P and Dow Jones index businesses. “I think, for the advisor, it’s not
