Most exchange traded fund firms are partnered with prominent index providers to market their products, but a growing faction of fund managers are beginning to get into the indexing game.

Some ETF providers are engineering products designed to reflect their own private indices, reports Ian Salisbury for Smart Money.

ETF products try to reflect the performance of an underlying benchmark index. For years, ETFs were based on well-known, name brand benchmarks, like the Standard & Poor’s indices. [What is an ETF? — Indexing]

Van Eck, the parent company behind the Market Vectors line, is marketing over a dozen ETFs indexed to in-house benchmarks, and several other firms, including iShares, are looking to create their own offerings. [Van Eck Launches Index Unit]

Industry observers note that the providers want to cut out the middle men, along with the hefty royalties that come with brand-name indices, and reduce costs for clients.

However, critics have cautioned that these new in-house ETFs come with risks, specifically their sampling methdologies. For instance, the Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF) underperformed the iShares MSCI Brazil Small Cap Index Fund (NSYEArca: EWZS), which uses a MSCI Index, by 3.5% in 2011. The Van Eck offering excludes the smallest Brazilian components and includes others additional holdings the MSCI Index would not.

Additionally, some caution that providers could even tweak holdings and investors wouldn’t know why the investments are performing the way they do.

For more information on ETF indices, 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. 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.

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