Business & Investment

Why the indexing industry needs a reset

Along with this growth, a huge number of market benchmarks have emerged to help investors track their investment performance, and as a result, support investment products such as ETFs, which were at the heart of the passive investment revolution.

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The indexing industry has spent 50 years driving the investment revolution, but overall, it needs to change very radically to position itself for the future. Otherwise, you run the risk of losing that relevance.

The truth is that recent records in the industry are mixed.

Innovation needs to be enhanced, especially in themes, multi-asset and strategic beta. More customization is needed to reach mainstream investors with the direct indexing promises made possible by technology. And above all, more competition is needed as more diverse providers provide better value to investors.

Industry competition has always driven better customization, choice and value for investors. And for the last 50 years, index providers have been the catalyst for positive change. But now, index providers are at risk of sacrificing our own success.

While the indexing industry can prove the fact that competition is fierce, competition does not seem to work particularly well for investors.

Twenty years after retail fund and ETF fees have more than halved, it seems wrong to me that the percentage fees for some ETF index data components are rising year by year. These data charges are inevitably passed on to investors.

This phenomenon is invisible to most investors and is somewhat hidden by the rising market and the stickiness that these conditions can create.

I’m not complaining, I’m not just observing. In daily conversations with investors and asset managers, we hear calls for alternatives to existing companies in the indexing industry.

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As clients recognize cost-cutting opportunities in mostly commercialized markets, broad market benchmarks and new areas such as themes and ESG where clients are looking for more insightful research-driven indexes. More and more changes are seen in both. Results and pricing structures that leave more money in the investor’s pocket.

The philosophy adopted is a more open and transparent approach to indexing, built on the notion that core beta is cheaper, better results, and more affordable. Better compatibility is becoming the norm for many parts of the investment environment, and indexes should be part of that long-term trend.

We are fully looking forward to seeing a larger, more diverse and more competitive indexing industry in five years with a more diverse and robust set of key players.

And investors expect to enjoy the benefits of this competition more fully.

Lombardy is President of Morningstar Index

Why the indexing industry needs a reset Why the indexing industry needs a reset

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