Self-Indexing: Conflict in the ETF Industry

Some ETF providers are going to great lengths to avoid index middlemen, which is causing concerns about a conflict of interest

Alastair Kellett 20 December, 2012 | 10:06AM

Most exchange-traded funds (ETFs) and exchange-traded products (ETPs) track indices that are compiled by well-known industry names such as S&P and MSCI. These popular benchmark providers are able to charge relatively high fees to ETP providers for using and tracking their brand-name indices, and then these costs are passed on to ETP investors.

But a shift is now going on in the industry that is seeing some ETP providers opt to create their own indices to avoid paying fees to benchmark providers. This has been dubbed "self-indexing". In theory, cost savings from this move can then be passed on to investors in the form of lower annual ETP fees. Stateside, WisdomTree and IndexIQ are self-indexing.

This change has deeply divided the industry.

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About Author

Alastair Kellett

Alastair Kellett  is an ETF analyst with Morningstar Europe.

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