FlexShares, the ETF sponsor backed by Northern Trust, filed paperwork with the Securities and Exchange Commission seeking permission to use its own indexes in ETFs it markets, making it the latest ETF company to move toward using its proprietary benchmarks.
The Chicago-based company, which cited in the filing ETF providers WisdomTree, IndexIQ and Van Eck as companies that the SEC has already permitted to use their own proprietary indexes in their respective ETFs, is following a similar regulatory request from iShares’ parent BlackRock to develop its own indexes.
The filings come at a time when the world of indexing has exploded in conjunction with the rapidly developing world of ETFs. With U.S.-listed ETF assets are over $1 trillion and most of that money is in indexed strategies, indexing has shifted gears from providing broad benchmarks for active managers to creating dynamic “investable” indexes for use in real investment products.
Some say this has transformed a formerly sleepy world of indexing with relatively low profit margins into to a much more aggressive business where price has become a source of disagreement between index companies and fund sponsors. In any case, the approvals the SEC has granted firm such as Van Eck, suggest it is putting aside previous concerns about conflicts of interest regarding self-indexed ETFs.
In its filing FlexShares said that aside from utilizing the relatively new self-indexing structure, its proposed indexes would be indistinguishable from existing equity and fixed income indexes used by other ETFs.
FlexShares also said that the structure of its self-indexing funds will be identical to self-indexing ETFs issued by WisdomTree, IndexIQ and Van Eck.
Also, the company said that potential conflicts of interest arising from the fact that the Index provider will be the advisor are a non-issue because the underlying indexes will maintain their required transparency by using third-party data vendors.
A Second Go In The ETF Business
FlexShares application to establish self-indexing funds comes on the heels of its September 2011 launch of a new family of four FlexShares ETFs, which have drawn in about $210 million since their launch about a month ago. About a year ago, the company also filed paperwork to market actively managed ETFs.
Two of FlexShares new ETFs are focused on Treasuries and two of them track Treasury-protected inflation securities. The four FlexShares funds and their characteristics are:
- FlexShares Morningstar U.S. Market Factor Tilt Index Fund (NYSEArca: TILT), with a 0.27 percent expense ratio and $7.39 million under management
- FlexShares Morningstar Global Upstream Natural Resources Index Fund (NYSEArca: GUNR), with a 0.48 percent expense ratio and $1.65 million under management
- FlexShares iBoxx 3-Year Target Duration TIPS Fund (NYSEArca: TDTT), with a 0.20 expense ratio and $99.28 million under management
- FlexShares iBoxx 5-year iBoxx 5-Year Target Duration Index Fund (NYSEArca: TDTF), with a 0.20 expense ratio and $103.67 million under management. This debt in the fund has targeted duration of five years.
FlexShares’ application to create self-indexing funds marks the company’s latest foray into the ETF market two years after its parent company Northern Trust bombed out with a previous family of ETFs.
In early 2009 in the wake of the 2008 market crash the company shut down its family of 17 ETFs only nine months after they launched. Those funds had managed to drawn $33 million.
Here’s how exchange-traded funds trade and what kind of orders are used.
Managing the premiums on the China A-shares fund ‘ASHR’ has been challenging, but things should get easier over time.
Which is better, banking on a dividend or on price appreciation?
While the fat lady hasn’t sung yet, these three ETFs strike me as the coolest launches of the year.