Smart beta is key driver of innovation, say index providers

Feb 22nd, 2017 | By | Category: ETF and Index News

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The Index Industry Association (IIA), a New York-based not-for-profit organisation, has released survey data revealing that the growth of smart beta has been the most significant driver of innovation in the sector, according to its members. IIA members include MSCI, FTSE Russell and S&P Dow Jones, all leading index providers to the ETF industry.

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Index providers highlight recent benefits to investors in the form of innovation, greater choice and lower fees.

“As innovation in the investment industry grows, it becomes even more important to address the topics that will help index administrators serve the needs of investors. This survey brings together a variety of opinions across the index industry and finds several common themes,” said Richard Redding, chief executive officer of IIA.

While factor-based investing is not new, a majority of IIA members surveyed feel the act of bringing the discipline of a rules-based methodology to a strategy different from traditional cap-weighted benchmarks is driving innovation in the industry and providing more choices for investors. Overall, IIA members felt that innovation around smart beta indices has opened access to a wider variety of new investment opportunities for a broader population.

The IIA survey, conducted in November 2016, offers an overview of the key index issues and innovations important to IIA’s members. Members were asked about the innovations, benefits and issues forming the current index landscape.

The survey also highlighted IIA members’ views that indices have become accurate benchmarks for various economic activities, allowing investors access to new asset classes and investment options. Investors have also benefitted from increased competition which has led to significant reductions in fund expense ratios.

Another key finding of the survey was index providers’ fears over the misconception that they create and offer products directly to investors. Index providers maintain a strict separation between commercial operations and the index administration function. Members were keen to point out that index providers do not trade the underlying component securities nor do they issue products traded by investors, thus mitigating conflicts that could naturally arise if they did.

“Indices have an increasingly important dual role for providing both benchmarks for investment management and the underlying index administration for the growing index-based asset management industry including the exchange-traded fund (ETF) space. For this reason, IIA members believe it is valuable to highlight the issues and topics they feel will have the biggest impact on the index industry,” said Redding.

Founded in 2012, the IIA is an independent organisation that represents global index providers. Current members include Bloomberg Barclays, Chicago Booth Center for Research in Security Prices, FTSE Russell, Intercontinental Data Services, IHSMarkit, Morningstar, MSCI, Nasdaq Global Indexes, S&P/Dow Jones Indices, SGX and STOXX.

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