The Outlook For Indexing In 2015

Now that 2014 has drawn to a close, market participants across the indexing sector can look back on another successful year. Passive management continues to grow in popularity, with the last twelve months seeing record-breaking inflows into ETFs, according to data in December from Thomson Reuters, and leading fund managers have stated they expect further growth in the future.

Looking to 2015, there are clearly a wide range of opportunities available to support more expansion. On a geographical front, I anticipate that investor focus will remain in the U.S. as well as continuing to expand in China. It is also likely that we will see further innovation around alternatively weighted and factor indexes, greater emphasis on environmental and social governance (ESG) products as well as continued attention regarding increased transparency and regulation.

It is important to note that the U.S. remains the world leader for exchange traded products (ETPs), and there is no expectation that this will weaken over the next year. It is encouraging to see the growing demand, both from retail and institutional investors, which is helping to drive greater competition, increased product choice and lower costs.

Going global

One of the most significant trends of the last few years has been the shift towards global benchmarks such as the FTSE All World and the MSCI ACWI, as portfolios become increasingly international.

While these global indexes capture much of the world’s economy, many are surprised to learn that China remains outside of the vast majority of these benchmarks. FTSE has previously stated that it expects to see the country included in the next five years; however, until then, China focused indexes will continue to grow in popularity. These index products range from those that track mainland stocks, to others that allow investors to prepare for the region’s eventual inclusion in global benchmarks.

Innovation and multi asset indexes

Arguably one of the most important factors in the continued growth in the use of indexes over the last few years is the high level of innovation that is now at the core of the design process, changing the concept of what constitutes an index. The market demand for so-called smart beta products, such as alternatively weighted or factor indexes, continues to develop.

In the future I feel there will be particular interest around multi-asset benchmarks and how these can be built and customised to reflect users’ requirements. Traditional market cap-weighted indexes will always serve a purpose but, overall, alternatively weighted and factor indexes will once again be at the cutting edge of the industry in 2015.

ESG products at the forefront

Another issue I expect to be the subject of much debate next year is the increased focus on developing the availability of ESG products. The second half of 2014 saw a number of institutions and fund managers start to examine the possibility of divesting a portion of their assets in response to increasing calls from investors.

From the Rockefeller Foundation to the students at Harvard, we will continue to see demand for more choice, accountability and transparency in every area of the investment process. Divestment is only the tip of the iceberg when it comes to ESG related products, and index providers will continue to develop new benchmarks to meet institutional and retail focus on responsible investment.

More focus on cost and regulation

Finally, in 2015 I believe that the industry will see an increased focus on cost and regulation. At FTSE, we remain fully committed to promoting the highest possible governance standards, endorsing the 2013 IOSCO Principles around benchmark design, methodology and accountability.  There is no doubt that increased regulation will also hugely influence the creation and management of indexes, with ETF providers looking for products that are built using consistent and transparent methodologies.

I believe that the whole of the indexing and the associated ETP sector can look forward to another strong year in 2015. I expect to see further growth throughout the industry, including in a number of areas I haven't referenced, such as fixed income. While we should be aware that there will always be potential headwinds on the horizon, it is clear these are outweighed by a host of opportunities.

Mark Makepeace is London Stock Exchange Group director, information services, and chief executive of FTSE Group