Jonathan Steinberg, the chief executive officer of the New York-based ETF firm WisdomTree, spoke recently with IndexUniverse.com Managing Editor Olly Ludwig as part of our ongoing look into the world of self-indexing. Steinberg is adamant that there’s nothing wrong with the way his firm does self-indexing, providing useful perspective given comments we’ve heard from others on the topic of self-indexing, including Alex Matturri of S&P and Steffen Scheuble of Structured Solutions AG.
Steinberg stressed that the self-indexing that WisdomTree helped pioneer goes to the heart of how the company has sought to distinguish itself with dividend- and earnings-focused securities screening in the world of ETFs. On a separate topic, Steinberg also said that the recent slowdown in new ETF fund filings and rollouts is sure to reverse as the economy heals and investor confidence again flows.
Ludwig: I wanted to ask you about self-indexing. Can you describe your broad approach?
Steinberg: We create all the intellectual property on the indexes. And then we have an index-calculation agent calculate the indexes, which is very good use of our resources and their resources. But it’s very different from paying basis points on growth of assets. It’s just a flat fee, so it’s a very cost-effective mechanism as you scale.
Ludwig: And that flat fee is annual?
Steinberg: Yes. And before we get more into this, let me just say one thing: Before ETFs, when you were an index provider—like an S&P or a Russell—you sold your intellectual property, or you licensed your intellectual property for a flat fee. So when Vanguard had their Vanguard 500 fund, they paid S&P a flat fee of $100,000 or something. It wasn’t until ETFs that the index providers changed their business model and started to charge on growth and assets, thus participating in the growth of the funds. It’s historical—it’s a subtlety, but I just want you to be aware of it.
Ludwig: OK. As you probably know, there's quite a lot of filing traffic at the SEC requesting exemptive relief to self-index. And without fail, your firm, IndexIQ and Van Eck—all three of you—are always mentioned as sort of legal precedents.
Steinberg: Yes, we were the first.
Ludwig: Right. So, is what you just described in terms of fee structure essentially a back-to-the-future kind of thing, that, if this self-indexing thing really takes off, it’s in some ways an attempt to move back to the way things once were before the ETF, which is to say the flat fee, like Vanguard paid to the S&P for its Vanguard 500 Fund?
Steinberg: Well, yes and no. Let me take you back to 1998, 1999, 2000: When I was looking at the business in those early days, and I wanted to get into the ETF industry, there was no way to compete with an S&P and a Russell and an MSCI on cap-weighted indexes, or more significantly, with Vanguard on cap-weighted indexes. Look at the problem that iShares and State Street face with Vanguard: There's no way to differentiate.
So WisdomTree was attempting to do something better. We worked on index construction, and that became the basis of our equity platform today—fundamentally weighted, dividend- and earnings-based ETFs.
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