Bye the Index

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In the late 1990s, Nasdaq set out to democratize investing. Retail investors were already flocking to its exchange but many didn’t know what to buy. “We wanted to put investment and trading products in the hands of investors that were Nasdaq-branded,” recalls John Jacobs, then head of strategic planning. “You didn’t have to pick a Nasdaq stock – you could pick a basket of Nasdaq stocks.”The Nasdaq-100 index tracking stock launched in March 1999. It was an immediate hit. Listed under the ticker QQQ on Nasdaq’s sister venue, the American Stock Exchange, it accumulated $12 billion in assets in its first year. By the time it transferred to Nasdaq five years later, trading volumes had increased from 6.9 million shares per day to 100.3 million – and a million investors held it.1As it grew, Nasdaq risked turning into an asset manager. An algorithm ran its investment process, but marketing required specialist resource. “So we looked around for a good partner,” says Jacobs, “and PowerShares was merging into Invesco, and when we talked to the team at Invesco they said we have 400 salespeople. Nasdaq had three. It was easy math to figure out that we would be able to broaden the distribution.”In partnership with Invesco, the fund continued to flourish. It charged investors 0.20% of net assets and ploughed much of that into marketing. As part of its deal with fundholders, any revenues left over after paying expenses such as licensing and trustee fees had to be used exclusively for marketing. With Nasdaq taking a licensing fee of around 0.08% of net assets and Bank of New York Mellon a t…