In the world of indexing for exchange traded funds, the undisputed leader in terms of brand recognition is MSCI (NYSE: MSCI). Inflows to ETFs benchmarked to MSCI indices through the first half of the year prove as much.
Investors poured $84 billion into ETFs in the first six months of 2014 with $29 billion, or 34%, going to funds tracking MSCI indexes. While major global funds such as the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the iShares MSCI EAFE ETF (NYSEArca: EFA) remained key drivers of asset growth among ETFs linked to MSCI indices, a batch of newer ETFs are helping drive growth for the index provider.
As Baer Pettit, MSCI managing director and head of the firm’s indexing business, noted in an interview with ETF Trends, the company’s ability to be the index provider of choice for so many new ETFs is the result of an intense focus on what he calls the three pillars: Quality, innovation and client support.
“Many of our new ETF assets really fall into second category – innovation,” said Pettit. “We’ve invested a tremendous amount in strategy and factor indexes in the last few years. It’s really starting to pay off as investors fined these indexes rally fit well into their portfolios to achieve a range of goals.”
Just last month, MSCI and State Street Global Advisors, the second-largest U.S. ETF issuer, partnered on three diversified global ETFs backed by the quality factor. [MSCI, State Street Partner on Quality ETFs]
Those launches were followed by the debut of six-single country ETFs benchmarked to MSCI indices that also focus on quality. New ETFs from that group of six include the SPDR MSCI Spain Quality Mix ETF (NYSEArca: QESP) and the SPDR MSCI Australia Quality Mix ETF (NYSEArca: QAUS). [State Street’s Quality Approach to New ETFs]
The quality factor “captures excess returns to stocks that are characterized by low debt, stable earnings growth and other ‘quality’ metrics,” according to MSCI.
Earlier this year, Market Vectors launched four ETFs that emphasize the quality factor while tracking MSCI indices, including the Market Vectors MSCI Emerging Markets Quality Dividend ETF (NYSEArca: QDEM).
MSCI’s portfolio and risk analytics business provides a starting point for the index innovation process. From there, MSCI speaks to “institutional investors or ETF strategists about these types of strategy indexes. They’ll often then determine their interest and, in parallel, we’re speaking to an ETF manager about creating the ETF. It also works the other way — with large ETF managers we try to innovate with them directly,” said Pettit.
In fact, Pettit added that MSCI is currently working directly with BlackRock (NYSE: BLK), parent company of iShares, on new product development.
More ETFs with at least $1 billion in assets under management follow MSCI indices than those of any other provider. That number could grow with help from the continued success of the iShares core lineup. [iShares Make Major Additions to Core Lineup]
The iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) and the iShares Core MSCI EAFE ETF (NYSEArca: IEFA), two of the original members of the iShares core lineup, have over $7.7 billion in combined assets under management while new core additions, such as the iShares Core MSCI Europe ETF (NYSEArca: IEUR), appear poised to added to the AUM tally for MSCI-backed ETFs.
ETFs such as EEM and EFA will likely always be among the pillars of funds following MSCI indices, but as Pettit notes, the success of a fund like IEMG speaks to the breadth and depth of the company’s index offerings.
“We don’t just focus on certain well-known indexes. We look at total equity opportunity and try to create a way that those opportunities become investible. What’s striking is that investors are going to our index families to get a broad range of index exposures and are looking to MSCI to become the framework to examine noteworthy opportunities rather than just a single index,” he said.
Another partnership is also helping cement MSCI’s role as a leading index provider. The company is the provider of indices for all 10 of the Fidelity sector ETFs that debuted last October. Each of those funds charge just 0.12% per year, making the lineup the least expensive sector ETF collection on the market.
That helped the group top $1 billion in combined AUM last month. At the end of June, five the Fidelity sector ETFs, including the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC), had over $100 million in AUM. [Fidelity ETFs Race to $1B in AUM]
“Fidelity is also a nice story about someone not traditionally in ETF business who’s found that this can fill an interesting strategic opportunity for them. We’ve been delighted to work with them,” said Pettit. “The ETF market isn’t monolithic. It’s not just about a few simple broad market exposures. ETFs can do specific things for specific investors and managers.”
Tom Lydon’s clients own shares of EEM, EFA and IEMG.