Small Index Providers Look To Thematics

The head of Indxx sees thematics as a way to compete with the three major index providers for market share.

Reviewed by: Dan Mika
Edited by: Dan Mika

As it stands, the market for indices is highly concentrated. MSCI, S&P and FTSE Russell account for almost 30% of U.S.-listed ETFs, while 191 providers are fighting for 50% of funds.



We spoke with Indxx Managing Partner Rahul Sen Sharma about the competition smaller index managers face, and their opportunities in the thematic ETF space.

This interview has been edited for clarity and brevity. What do you think the demand is going to be over the next six to 12 months and beyond for bespoke indexes based on your conversations with ETF issuers?

Sen Sharma: We were one of the earlier innovators in the thematic indexing space. We launched a suite of indexes that we licensed to Global X back in 2015-2016. We’ve seen strong demand from our customer base since then. Our assets are up more than 150% over the last 12 months.

What we see in the market, and all the research that we have done, leads us to believe that that will continue, if not accelerate—not only in the U.S., but also in other markets where we have indices licensed.

We expect the trend to continue and to grow very rapidly in Europe, in the Middle East, where we have a number of products, well over $1 billion tracking our indexes, as well as in Asia Pacific; so, South Korea, Japan, Taiwan, Hong Kong, Australia, to name a few markets. We see this as something that’s really reached a critical mass, and is going global as well. Has there been more demand for ESG in the form of climate change and clean-energy-focused indexes that you publish, or are asked to create, both in the U.S. and abroad?

Sen Sharma: Both. We have built and licensed a climate change solutions index in the Middle East. We have built and licensed an ESG-screened index in Europe. Renewable energy is an area where we’ve had launches recently, and ESG as well. It’s across the board. I would say there is more interest overseas than there is in the U.S.

But we have also launched, for example, a clean tech product for Global X that’s done pretty well. And we’re having other conversations too. It is a global story, not only in thematics, but also ESG, as well as clean energy and climate-change-related solutions. Why do you think there's been more interest in ESG products overseas than in the U.S?

Sen Sharma: In Europe, I think it’s being driven primarily by some of the regulations that are out there that have recently come into force. But I think overseas, if you look at markets like the Middle East, at APAC, especially with regard to Australia, and even in the U.S now, people are starting to see that these events from a climate-related perspective are becoming more and more common, maybe on an annual basis with regard to wildfires, extreme weather events, heat waves.

I think it started to enter people’s consciousness. People are interested in investing in what they know. And I think that’s one of the reasons technology, and our technology indices, have been so successful; because people interact with technology on a daily basis. We understand cloud computing. We understand cybersecurity. We understand 5G technology, where we’ve had very successful thematic indexes.

To a certain extent, we also understand health care. I think that with the revolutions that are happening there, we’re having good success with some of our cutting-edge health care innovation and disruptive technologies indices. The most popular funds in those cutting-edge areas that investors seem to be really interested in are actively managed, like the Ark funds. What do you think is the value proposition going forward for an ETF issuer thinking about going the active route and saving the cost of having to pay for an index to be constituted and maintained?

Sen Sharma: I have a vested interest as an index provider in saying this, but let me try and be as unbiased as possible when I say all empirical research shows—and don’t take my word for it, take it from Nobel Prize winners and others out there—that passive investing is, long term, the way to go.

Is there a small subset of active managers that do outperform? Well, the data shows that there are, but they're extremely small. And there's no way to identify who those are beforehand. I think Burton Malkiel said it best: Rather than try to beat the market, why don’t you just buy the market?

What we try and do as index providers is we don’t look at valuations. We don’t think whether the market is overvalued or undervalued. From a thematic perspective, what we’re trying to do is just identify a theme and target it in the most effective way possible. That’s been our core business for the last 10-15 years, now.

There have been other index providers and asset managers that have been here for decades. But we believe that it works, and we follow our process. We have a lot of confidence in the passive model. About 30% of the U.S.-listed ETFs are following indexes from FTSE Russell, the S&P or MSCI. About 20% have no listed index, and the other 50% are following about 190 other index providers. Those big three providers are really dominant. As the ETF industry grows, what do you expect to see, in terms of diversifying from that provider concentration and where indexes are being licensed from? Do thematics play a role in that?

Sen Sharma: I'm sure that if you looked at it from an AUM perspective, there would be even more concentration within the top three. I think that’s something that's always going to be around. You're always going to have strong players among those three that dominate the market.

But I do think there’s a space for index providers like ourselves that offer top quality indexes quickly, cost-effectively. That’s been our [unique selling point] since we started. Fortunately, we’ve been lucky to have been successful at that—to offer high quality, well-researched indexes, customized quickly.

As the space grows, I think what’s going to continue to power the industry forward is increased diversification and increased competition. What’s interesting to us is that we were one of the first providers to really be able to dig into the thematic indexes space with some of our core clients, and now you see some of these big three getting in the thematic space as well.

Competition is good, and we believe that can only benefit entrepreneurship and the overall market when you have diverse ideas competing against each other.

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Dan Mika is a reporter for He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.