Reflective of the growth of the exchange traded funds industry, index providers are frequently launching more new, increasingly sophisticated product offerings in an effort to bolster revenue and capitalize on new trends in the ETF business.
Investors should not dismiss the importance of an ETF issuer’s index selection. Nearly $1.5 trillion in U.S. ETF assets benchmarked to passive indices say as much and tracking error, an ETF’s behavior relative to its underlying index net of fees, is a crucial determinant of investors’ returns.
Just as the sponsor side of the ETF business remains top heavy with BlackRock’s (NYSE: BLK) iShares, State Street’s (NYSE: STT) State Street Global Advisors and Vanguard holding over 80% of U.S. ETF assets, the ETF indexing industry is dominated by a small number of players.
“Of roughly 70 equity index providers in the stock market today, the top six account for 85% of all ETF assets. The top two — S&P and MSCI — account for 53%,” reports Aparna Narayannan for Investor’s Business Daily.
As of the end of July, 619 ETFs with assets of $716 billion are based upon indices calculated and published by S&P Dow Jones Indices, the index provider said in a statement issued Thursday.
MSCI (NYSE: MSCI) is another index provider that is expanding its already dominant perch. The provider of benchmarks for some of the world’s largest ETFs, including the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the iShares MSCI EAFE ETF (NYSEArca: EFA), MSCI said investors poured $84 billion into ETFs in the first six months of 2014 with $29 billion, or 34%, going to funds tracking its indices. [New ETFs Bolster MSCI Index Dominance]
FTSE Group, a unit of the London Stock Exchange, has seen its U.S. presence swell, too. “The company’s indexes are tracked by 114 North American ETFs — nearly double the number three years ago — with $156.7 billion in assets,” according to IBD.
FTSE recently announced that China ETFs, including the iShares China Large-Cap ETF (NYSEArca: FXI), tracking its indices topped $20 billion in combined assets under management. Other large U.S.-listed ETFs tracking FTSE indices include the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the Vanguard FTSE Europe ETF (NYSEArca: VGK). [FTSE-Backed China ETFs Top $20B in AUM]
While brand recognition is one part of the index selection process, ETF issuers also have to consider licensing costs, liquidity of index’s components and the overall availability of index.
Asset managers who are thinking about putting their own strategy to work in an ETF wrapper can attend the upcoming ETF Bootcamp conference event that is slated for September 29 and 30 in New York City where index provider selection will be a featured panel.
Tom Lydon’s clients own shares of EEM and EFA.