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Finding The Right Index To Fit A New ETF


Before launching a new exchange traded fund, an issuer will have to find the right index to implement their investment strategy. Index providers are the backbone of the ETF industry and selecting the right partner will help determine future success.

In the upcoming ETF Boot Camp conference event in New York City slated for September 29-30, asset managers who want to launch a new ETF can hear from index providers and learn the best practices for implementing an index-based ETF strategy.

Ken O’Keeffe, Managing Director for Russell Indexes, Brett Hammond, Managing Director and Head of Index Applied Research for MSCI Inc., David Krein, Managing Director and Head of Research for NASDAQ OMX Global Indexes, and Rahul Sen Sharma, Partner at Indxx LLC, will be sharing stories and experiences they’ve had with bringing a new ETF to market.

Asset managers should not ignore the importance of the index selection process. With about $1.5 trillion in U.S.-listed ETFs benchmarked to passive indices, providers will have make their new ETF offerings distinguishable from the rest. [A Look at How ETF Issuers Select Index Providers]

With index-based ETFs, investors are capable of constructing portfolios with broad and diversified exposures while also tailoring their portfolio with a certain level of risk. Consequently, asset managers, along with index providers, will have to use the right mix of ingredients to craft an index methodology that will help distinguish the final product from among the thousands of indices in the marketplace.

Russell Indexes outlines three broad design categories that investors will consider, including market coverage, construction approach and ongoing maintenance. Market coverage includes representativeness of the targeted are of the market and how the portfolio fits to a broader investment strategy. Construction approach includes weighting, objectivity and transparency. Ongoing maintenance includes regular rebalancing and corporate actions that will could change the make up of the index.

It is not enough for someone to go to an index provider and ask to make an index based on an investment strategy. Asset managers can go to an index provider to set unique parameters based on regions, sectors, theme, taxes, regulatory constraints, calculation methods or specific investment strategies to create the exact index needed, according to NASDAQ OMX.

New providers will also have to consider the type of investment base they are targeting. For instance, MSCI indices have acted as the benchmark choice for international equity ETFs for 88% of institutional investors, according to MSCI.

Asset managers who are thinking about putting their own strategy to work in an ETF wrapper can find more information on index provider selection at the upcoming ETF Boot Camp.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.