Exchange-traded fund providers are increasingly looking at self-indexing as a way to reduce costs, amid continued downward pressure on fees charged for asset management as returns have steadily fallen in recent years.
A major cost for ETFs is the licensing of mainstream indexes run by the likes of FTSE, MSCI and Standard & Poor’s, whose revenues from licensing have been growing strongly (by 11% on average in 2016). There have been reports that some of the big ETF providers are looking at alternatives.
The Financial Times reported on May 24 that some of the large managers had floated the idea of forming an industry “co-operative” to create indexes rivalling those of the big players such as FTSE, MSCI and Standard & Poor's.
State Street Global Advisors, one of the biggest ETF providers, is considering making more use of self-indexing, said Susan Darroch, the US firm's Asia-Pacific head of global equity beta solutions. “It’s certainly a way of reducing the fee burden, and if that gives a good outcome for investors then it’s certainly something that is worthwhile looking into,” she told AsianInvestor.
But Sydney-based Darroch said she had not been privy to any discussions between ETF providers looking to act collectively to create their own indices.
For its part, BlackRock's iShares, the world's biggest ETF provider by assets, is not considering any move that would cut the mainstream index providers out of the mix, said a spokesperson for the firm.
Darroch noted that it would certainly be possible for firms, individually or as a group, to devise alternative cap-weighted broad market indexes no different from those provided by mainstream index providers. They would still need to be investable and use the cap-weighted concept, she said.
“But I don’t know that self-indexing has to be competing for a big broad index that is out there already,” she added. “In many cases, we are creating an index because there’s nothing out there in the market that is reflective of what the client wanted.”
New index ideas
Increasingly, new ETF products are centred around concepts such as smart beta and environmental, social and governance (ESG) factors, said Darroch, and those are the factors that are changing the nature of investing.
SSGA has developed its own indexes in such areas, she added, citing one based on the gender and diversity of the management team at different companies. It is based on data showing that companies that have more diverse senior management in terms of gender tend to perform better in the long run, she noted.
Moreover, US-based Van Eck, which runs the Vector ETF range, has its own independent, third-party indexing business.
And many smaller index providers have come to market with bespoke and thematic products, noted Tobias Bland, chief executive of Hong Kong fund house Enhanced Investment Products. He cited as an example ETFs that track companies involved in robotics and automation.
Ultimately, said Bland, “the [fund manager] is much more interested in what the ETF does than who the index provider is”.