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Special report: Super Beta

Index providers reap a real bonanza from passive push

Reggie Browne said interest in fixed income will be good for FTSE Russell.

Updated with correction.

The rise of passive investing has resulted in a major boon for index providers.

Hundreds of new indexes have been added in the past several years, adding twists to plain-vanilla indexes.

These new indexes track factors such as corporations' efforts to reduce carbon emissions, or offer alternatives to traditional market-capitalization-weighted indexes by equal-weighting stocks.

The new indexes are used as part of smart beta or factor-based strategies that can be part of a separate account or mutual fund or come in an ETF wrapper.

"The growth of passive investing has meant more and more indexes," said Reggie Browne, senior managing director, exchange-traded funds group at Cantor Fitzgerald in New York.

It also has meant strong profits for the four largest index providers: S&P Dow Jones Indices, MSCI Inc., FTSE Russell and Bloomberg LP, which control about two-thirds of the market.

Also benefiting are smaller index firms such as Solactive, a Frankfurt, Germany-based index provider founded in 2007. More than 250 ETFs use its indexes, up from just 25 in 2010, said spokeswoman Lucia Pitteri in an e-mail.

Ms. Pitteri attributes the rise of passive investing, and in particular ETFs, as a key factor in company growth. She said $100 billion in investment strategies are linked to Solactive's indexes.

Still that's small compared to the larger players. FTSE Russell statistics show $15 trillion of investible assets linked to its benchmarks.

FTSE Russell for one, keeps on getting bigger. Its owner, the London Stock Exchange Group, announced in May it had purchased Citigroup's global bond index business for $685 million and merged it into FTSE.

The purchase will allow FTSE Russell to capitalize on growing investor interest in fixed-income ETFs, said Cantor Fitzgerald's Mr. Browne.

Rolf Agather, Seattle-based director of global research and innovation with FTSE Russell, credited the growth of indexes to 2004, when Research Affiliates LLC unveiled its fundamental indexes, which offered alternatives to cap-weighted indexes.

"They pierced the veil," he said. "They literally changed the definition of what we consider an index. It went from being something that was cap-weighted, broad market exposure to rules-based and transparent."

The ETF industry also spurred enormous growth for indexes.

"All the existing indexes had been licensed and yet you had this growing industry," Mr. Agather said. "Clearly the investment product providers wanted to keep growing and it created a huge demand."