Behind A Disruptive Index Provider

EQM Indexes is a small, young, woman-owned index shop behind some of the market’s most disruptive benchmarks and ETFs. The firm’s lineup of indices underly funds such as the Amplify Online Retail (IBUY), the Brand Value ETF (BVAL), and the Tactile Analytics ETF (ARVR). Leading the push to break new ground in the index front is Jane Edmondson, co-founder and CEO of the three-year-old firm, and a former portfolio manager and quant. Edmondson offers here a look into the art and science of creating a new index.

ETF.com: How did you first get involved with the index business?

Jane Edmondson: I've been in the industry over 25 years. Prior to EQM, I was a quantitative portfolio manager with Allianz Global Investors. Building quant models is very similar to what we're doing on the index side—building a rules-based screening approach to indexes and portfolios.

I first got interested in ETFs when I was doing a consulting job with an ETF client. I came away with the feeling that this is where innovation is going to be in the financial industry. I was very excited. So, we regrouped and thought, “How could we be a part of this?”

That’s when I came up with the idea for the Online Retail Index, which we put together and then sought a partner for: Amplify and its first ETF, the Amplify Online Retail (IBUY). The rest is history. We now have six indexes, all in that disruptive thematic area.

ETF.com: Index methodology and brand are big parts of ETF due diligence. How do you tackle the challenge of gaining presence for EQM?

Edmondson: We're not trying to compete with the S&Ps of the world. We're trying to carve out a niche in disruptive thematic indexes. Ultimately, we're looking to partner with ETF sponsors. Either we'll create an idea, or people come to us. Sometimes it's advisors that have a great idea for an ETF index. We help put them together.

We've partnered with some of the smaller, boutique ETF sponsors, like Amplify, Exponential ETFs and Toroso. We've tried to partner with smaller firms that are a little more entrepreneurial. But we worry less about brand name than what we're actually doing in the industry. We’re trying to be disruptive. We're not the biggest player out there, but we play above our size as far as the exposure we get and the products we're involved with.

ETF.com: How are new index ideas born?

Edmondson: It’s like a think tank. We sit back and look for exciting areas that don't already have a product associated with them. It could be a disruptive technology or it could be some sort of disruptive theme.

For example, the brand value index is not about a disruptive tech, but it’s a disruption where not all assets appear on the balance sheet. We look for intangible assets such as data, brand and intellectual property. That’s what we're capturing there.

Obviously, not every idea is going to be investable. You can't just have a theme for a theme's sake. There's got to be an economic rationale behind it.

ETF.com: What's the craziest index idea you've ever shepherded through or turned away?

Edmondson: We've had some crazy ideas. I’d say it was the “Simon Says Index.” There is a randomizer that tells you what to buy, like Simon Says: Simon Says buy Apple. Simon Says … you get the idea. That’s a perfect example of how we distinguish between what is random and luck-based, versus economically sensible, and rules-based.

It's funny because some of the craziest ideas sometimes end up being good ideas.

Two years ago, when we got started, there were product people coming to us with the idea for a cannabis ETF. At the time, most of the companies were penny stocks, very illiquid, and it just didn't translate well to a product [for us]. Now, it's one of the hottest things out there. So, sometimes crazy ideas can morph into real ideas down the line.

ETF.com: In what areas do you see opportunity for new indexes? Pot? Bitcoin?

Edmondson: Those are all areas we're looking at. Other areas we’re interested in are fixed income and ESG.

I'm female, so some sort of women-themed product is something we've developed internally and would love to find the right partner for. I try to be a mentor and champion for women in the industry. There are just not enough women in finance. To have some sort of a product that ties in to that is on the bucket list.

ETF.com: How quickly can you take a new idea into an index launch?

Edmondson: It depends. For blockchain, for example, we knew there were other people developing products in that area, so we put together that index in about two weeks. We were working on it 24/7. If market demand dictates, we can get these things out pretty quickly. Normally it would take one to two months to put an index together from the time somebody comes up with an idea to actually launching it in the marketplace.

ETF.com: All EQM indexes are equal- or modified-equal-weighted. What does this weighting scheme say about your philosophy?

Edmondson: I came into this industry with a fresh perspective. I didn't really think indexes had to be market-cap-weighted, even though that was the tradition. When you're dealing with an investment theme or a technology theme, you don't really know who the next champions are going to be in that industry.

For example, for online retail, we didn't want Amazon (AMZN) and Alibaba (BABA) to dominate the portfolio, because we thought there was more opportunity with some of the smaller-cap names. We wanted to find the next Amazon, the next Alibaba, so we did equal weighting there. But we're not married to that. More recently, we've been looking at liquidity weighting.

ETF.com: All EQM indexes are either calculated and/or published by Solactive or Thomson Reuters. Why outsource?

Edmondson: We're both the index developer and the index administrator. We determine what names go in the equity basket. Once we develop an index, we outsource the operations side to someone like Solactive or Thomson Reuters, and they do the daily calculations and the publishing of the indexes on the different outlets out there, like Bloomberg or the Thomson Reuters Eikon system. We do have an index committee for each of the indexes we have.

ETF.com: As the index provider, do you consider whether or not an ETF tied to your index will become the next billion-dollar fund?

Edmondson: Yes. The index licensing fee is tied to the assets under management. We don't just charge a flat fee, so we really view ourselves as a partner in the ETF success process.

We do a lot of marketing to help ETF providers get traction; we write content and white papers. We blog and talk about the products. We're pretty active on social media. In a way, that’s also where we’re carving out a niche, because I don't see many other firms on the index side supporting their clients that way.

Contact Cinthia Murphy at [email protected]