As investors gain familiarity with exchange traded funds, more are searching for the best product to track or beat the market, which has put pressure on index providers to create better benchmarks.
ETF providers now have the flexibility to pick from multiple index providers that offer similar benchmarks, writes John L. Jacobs for Pensions & Investments. Consequently, the increased competition among index providers has helped drive down costs and reduce ETF expense ratios.
For instance, Vanguard decided to drop the benchmarks on a group of ETFs benchmarked to MSCI indices for FTSE and University of Chicago’s Center for Research in Security Prices (CRSP) indices in 2012 to lower costs. [Vanguard ETFs Gather $40 Billion After Index Switch]
As the ETF industry continues to expand, the differences between various index providers is quickly blurring, allowing ETF providers to switch from one indexer to another.
Nevertheless, there are exceptions. For instance, flagship indices like the S&P 500 and the Nasdaq-100 remain stalwarts in the industry. Additionally, some niche indices that focus on specific sub-sectors or assets, like the Nasdaq Biotechnology Index, still stand out.
With skirmishes in the so-called fee war in the ETF still ongoing, ETF providers are trying to reduce costs wherever they can. They are becoming more aware of the costs associated with indexing and more willing to look at alternatives. All of this, though, means that the end-users, or investors, will be saving more and focus on potentially greater returns.
For more information on indexing in ETFs, 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.