A robust and lucrative corner of the exchange-traded fund business is drawing fresh scrutiny and new questions that cut to the core of the ETF value proposition: Do indexes matter?
Regulators, asset managers and investors in the U.S. are showing by their words and actions that they are reconsidering the value of independent index providers such as S&P Dow Jones Indices, a majority-owned business of S&P Global; the FTSE Russell unit of the London Stock Exchange Group; and MSCI Inc.
For example, on Sept. 18, State Street Global Advisors introduced five ETFs tracking country indexes maintained by German index firm Solactive. Four of the ETFs previously were tracking MSCI indexes and carried 0.30% expense ratios. The new products cost 0.14%.
In August, BlackRock Inc.'s iShares unit swapped indexes and cut expense ratios on four fixed-income ETFs. Affecting nearly $20 billion in assets, the four ETFs moved to indexes maintained by Intercontinental Exchange and Bank of America Merrill Lynch from Bloomberg Barclays indexes.
An earlier but more significant index transition occurred when Vanguard Group Inc. jumped to the Center for Research in Security Prices and FTSE Russell from MSCI for 22 funds in the fall of 2012, sending MSCI shares down nearly 30% on the news.
The CRSP is now the backbone for 10.5% of U.S.-listed indexed equity ETFs, up from 8.3% in 2014, according to research firm XTF Inc, a unit of London Stock Exchange Group.
Comparatively, S&P Dow Jones Indices supports 42% of the $2.9 trillion indexed-equity exchange-traded product market, with 18% to FTSE Russell and 17% to MSCI. Collectively, the market share of the top three index firms has been consistent for five years.
An emerging challenge to those dominant index providers also is coming from asset managers themselves.
The phenomenon known as "self-indexing" was first championed by WisdomTree Investments, which manages $41 billion in ETFs, primarily on its own equity indexes focusing on earnings and dividends.
Other ETF providers that have found success with affiliated index providers include Goldman Sachs Asset Management, State Street Global Advisors, Northern Trust, Victory Capital Management Inc. and J.P. Morgan Asset Management.
Each firm has more than $3 billion in self-indexed equity ETF assets under management, according to XTF.