ETFs Drive Innovation in Index Construction

July 29th at 8:00am by Tom Lydon

The number of U.S. exchange traded funds is shooting past the 1,000 milestone. While the ETF industry has been expanding, the industry for index providers has also exploded along with new product offerings.

ETF sponsors are moving beyond the broad diversified fund space and looking into targeted niche products, which has also pushed the need for new indices to meet the evolution in ETFs.

Most ETFs follow indices managed by large, prominent index providers, such as S&P, Russell, MSCI and Barclays Capital, reports Jackie Noblett for Financial Times. New index developments will have to be tailored to reflect the needs of innovative fund products.

“ETFs are entering a new expansionary phase,” remarked Ted Niggli, head of indices at MSCI, in the report.

Fund sponsors usually look at large index providers since they have the brand, experience and scale needed to expand upon existing fund products.

“We look at the brand of the index provider, their control processes, because reputation is very important. Once we get down to specific indices, quite often we’re faced with a couple of choices,” said Scott Ebner, head of global ETF product development at SSgA.

However, as the broad, diversified index space becomes “pretty much build out,” commented Alexander Matturri, executive managing partner at S&P, large providers are now looking at alternative options offered by smaller developers, like Research Affiliates. [Dynamic Indexing: Is It Enough of a Safety Net?]

Not to be out outdone, S&P, Russell and MSCI have also begun developing and licensing concepts outside of their traditional cap-weighted methodologies. Rydex SGI has signed licensing deals with Russell and MSCI for equal-weight emerging markets and U.S. equity ETFs. Furthermore, ideas for indices based on volatility, momentum and correlation, and segmenting existing emerging market indices are just some of the ways ETF sponsors will keep on expanding the fund universe. [How Russell’s New ETFs are Different.]

For more information on ETF indexing, visit our indexing category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers