ProShares Looks To Self-Index ETFs

October 30, 2012

ProShares joins a growing number of ETF firms looking to self-index.

ProShares, the largest purveyor of leveraged and inverse ETF strategies, filed a petition with U.S. regulators seeking permission to self-index funds, the latest firm looking to join what amounts to something of a trend in the world of exchange-traded funds.

ETF firms see self-indexing as a way to not only serve up increasingly intricate and customized index methodologies—and ETFs that track them—but also to reduce ETF costs.

Companies like WisdomTree, IndexIQ and Van Eck already market funds with such “affiliated indexes,” but the phenomenon became harder to ignore when BlackRock’s iShares—the largest ETF provider in the world—filed to self-index in the summer of 2011. That petition is still sitting in the regulatory pipeline.

Among the other ETF firms that have filed to self-index in the past year are Northern Trust’s ETF arm FlexShares and Guggenheim Partners.

It’s not totally clear that self-indexing is indeed a money-saving initiative for an ETF provider. Well-established index powerhouses have argued that the infrastructure and the governance needed for an index unit are costly and would make no sense for a company that lacks scale to absorb those costs.

What’s more, many argue that having index-building and portfolio management under one roof raises a raft of conflict-of-interest possibilities that, at the end of the day, are detrimental to investors.

But if cost is an issue, it’s clear that if ETF providers aren’t going in the direction of self-indexing, they’re more than willing to shop around for a good deal.

Take Vanguard, which earlier this month said it was ditching a number of MSCI indexes on 22 of its ETFs for credible, but cheaper, indexes designed by FTSE and CRSP. While terms weren’t disclosed, Vanguard made clear costs were at the center of its decision.



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