“Index Providers Are Massively Dull—and Massively Profitable” was a Financial Times Alphaville headline that caught my eye in 2024. I consider the author Robin Wigglesworth to be a must-read. I loved his book Trillions about the Birth of passive investing, and he once made me laugh by describing his name as “Harry Potter-esque.”
Wigglesworth is certainly right about the index industry’s profitability, and my wife would agree with the “dull” part. Her eyes glaze over at the very mention of “beta,” while my attempts to explain the difference between “rebalancing” and “reconstitution” have killed more than one date night.
Still, as a 10-year veteran of Morningstar Indexes, I take the insinuation that indexing is boring as a challenge. Remove your wand, Mr. Wigglesworth. (That’s a Harry Potter dueling reference for the uninitiated.) Here, I will argue that analyzing indexes can yield meaningful insights for investors. Not dull at all.
Wait, You Do What?
When I moved from Morningstar’s Manager Research team to the indexes group in 2015, I got a lot of furrowed eyebrows.
“So, you’re going to analyze benchmarks?”
Sort of. Morningstar has a passive strategies research team that parses the index methodologies underpinning exchange-traded funds and other investments. As a strategist with Morningstar Indexes, my role is to write and talk about investing through the lens of our proprietary benchmark range.
“Lens” is a metaphor I borrowed from Morningstar Managing Director Don Phillips. He’s a professional hero—the kind of guy who quotes Blaise Pascal and also road trips to Traverse City Pit Spitters minor league baseball games—when he’s not inventing the Morningstar Style Box. He sees indexes as tools that serve investors.
“With the recent mania to create investable indexes for ETFs, it’s easy to lose sight of the utility of indexes as analytical tools,” Phillips wrote in a 2009 article called “A Multiple-Lens Approach to Analysis.” “When properly constructed, an index can facilitate a better understanding of investment activities. It can be a lens that brings investment issues into focus, providing a framework that allows for better analysis. While no one lens will explain all markets, a series of lenses can forge a valuable toolkit for investment analysis.”
Consider indexing’s origins. When Messrs. Dow and Jones created the first market index, it wasn’t for benchmarking purposes, and they certainly didn’t envision passive, index-tracking investment strategies. It was simply a measure that told newspaper readers if the market was up or down. When stock exchanges got into indexing it was to showcase their listed companies, while bond indexes began as a means of displaying inventory.
Defining “the market” remains the index’s essential function. As baskets of securities meant to represent the opportunity set for investors, they delineate asset classes and investment segments. Indexes measure risk and return, reflect market composition, and power portfolio-building models.