Self-Indexing Trend Raises Conflict-of-Interest Concerns for ETFs

More ETF managers are opting to use in-house benchmarks for their funds to cut costs, but the trend is raising concerns about conflicts of interest in the $1.3 trillion industry.

Some ETF firms are deciding to manage their own indices rather than pay benchmark licensing fees to third-party providers.

ProShares in a recent regulatory filing requested permission from the SEC to use in-house indices for its ETFs. Van Eck’s Market Vectors and WisdomTree (NasdaqGM: WETF) are among the firms that already run ETFs based on their own benchmarks. [More ETF Firms Joining Self-Indexing Trend]

“This change has deeply divided the industry,” reports Morningstar’s Alastair Kellett.

“There are concerns about the transparency of these new ‘no-name’ indices and concerns over potential conflicts of interests,” the analyst wrote in a commentary posted Thursday. “In particular, opponents to self-indexing cite potential problems around the pricing of index constituents, the embedding of poorly disclosed costs, sub-optimal index construction methodology, and incentives to tweak the index rules to boost performance.”

Other ETF firms that have filed to self-index in the past year are Northern Trust’s  (NasdaqGM: NTRS) ETF arm FlexShares and Guggenheim Partners.