While it hasn’t received nearly as much attention as the ETF industry, the evolution of the indexing industry has played a vital role in helping exchange-traded products become as popular, and useful, as they are today. As such, we think it’s worth taking a moment to shine the spotlight onto one of the indexing firms operating behind the scenes.
We recently had a chance to talk with Rahul Sen Sharma, Partner at Indxx, about his firm’s role in the ETF industry and key trends in the indexing space.
ETF Database: What’s your firms story? What role do you play in the ETF industry?
Rahul Sen Sharma (RSS): We initially started as a research firm in 2005. Looking back, it’s hard to believe how much things have changed over the last 10 years, both in terms of the growth of our firm and the ETF industry. Today, in addition to our research and analytics divisions, we are an innovative index provider with about $500 million in ETF assets linked to our indices. Our current client list ranges from firms just entering the industry, to entrenched and successful ETF sponsors with billions of dollars under management.
We occupy a unique space in the index business, and our goal is to redefine the industry in terms of innovation, quality, speed and cost. We not only develop unique index concepts in-house, but we also work closely with our ETF clients to develop custom indices that best meet their needs. This involves not just going through the motions of back testing and calculation, but thinking about how we can add value at every stage. This often involves our Analytics division, which looks at the entire competitive landscape for a potential ETF before we even start work on an index.
Once the index is complete, our research division prepares a steady stream of content to ensure that an index is highlighted whenever possible. As a firm with a deep pool of experienced team members, many of whom are hold advanced degrees and CFA charters, we are most happy when working on cutting-edge, innovative products, as that is what we believe will drive the industry forward and result in our success as well.
Another area we are getting more involved in is analyzing existing ETFs for issuers that have been struggling to raise assets and developing a set of recommendation to improve and replace the underlying index. This is a key area where we are seeing significantly more business, as ETF sponsors decide whether to close a struggling fund or work with a firm like ours to replace the underlying index and give it a fresh look.
ETF Database: What are the most successful ETFs that utilize your benchmarks? Please elaborate on their success.
RSS: We define success not just in terms of assets, but also in terms of innovation. Based on that definition, the most successful ETF that is currently tied to our benchmark is the Global X SuperDividend US ETF (DIV). In less than two years, the fund has accumulated more than $300 million in assets. We believe that this is a great case study of innovation in the ETF industry, and the underlying index had a yield of well over 6% with a beta to the S&P 500 of 0.61 in 2014.
Another very unique ETF tied to one of our indices, the QuantShares Hedged Dividend Income Fund (DIVA), launched earlier this year. Our underlying index generates a very attractive current yield of almost 4.5% with a beta to the S&P in 2014 of only 0.17. It’s really an index we are very proud of as it has volatility that is similar to fixed income, but with significantly higher yields.
ETF Database: With regards to foreign equity indexes, what sort of expertise does your firm bring to the table?
RSS: We have a long history in foreign equity indices, having created our first back in 2008. To date, we have licensed more than 40 emerging market and foreign indices to clients around the globe. Understanding the differences that exist between various markets is especially important when building more complex, factor-based or “smart beta” indices. Oftentimes, this understanding can make the difference between an index that makes sense and is successful, and one that just doesn’t work or fails to differentiate itself from the competition.
ETF Database: Going forward, what do you see as the potential growth areas for ETFs?
RSS: Over the last few years, we’ve seen the success of a number of innovative new strategies that would have been unthinkable just a few years ago, and we believe that the industry is well-positioned for future growth in a number of areas. As the market grows and new entrants emerge, we believe we are going to continue to see innovation not only in the equity space, but also in fixed income.
In addition, the use of multi-asset indices to achieve a particular objective will also be a trend. As a firm, we’re well placed to take advantage of these trends. Overall, all of these developments will serve to not just bring more retail investors into the ETF market, but also bring larger firms and, commensurately, larger assets.
ETF Database: There are some out there who believe ETFs have gone too far from their initial intention of offering broad-based exposure to buy-and-hold investors. What’s your take on the innovation in the ETF industry over the last several years?
RSS: Evolution is something we’ve seen in the ETF and indexing spaces since they began. In the end, investors vote with their dollars and, as a result, we’ve seen the industry grow well beyond where it started, with simple, broad-based geographic exposure. As long as there is money to be made and allocated, innovation will keep happening, and Indxx is going to keep pushing the boundaries of what’s possible to accomplish in a passive index.
The Bottom Line
Keep your eye on the indexing space as it remains a key source of innovation that drives growth on the ETF product development front. Innovation among index providers will remain a pivotal driver for further democratizing the investment landscape.
Follow me on Twitter @Sbojinov
For more ETF analysis, make sure to sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.