Sunand Menon of Thomson Reuters explains some of the latest trends in the demand for and use of indices and index products globally, and looks at how the market is likely to develop going forward.

Date: Jan 2011

Tags: Indices, Index products, ETFs

• Stock exchanges are using indices significantly more than they were before the financial crisis
• A common mistake investors make is to think that each index for a particular region or sector is identical
• The projected growth rate of the index business over the next few years is at least 10% to 15%
• This will set the stage for some innovative products, not only on the passive side, but also in terms of some alpha-seeking indices

According to Sunand Menon in an interview, stock exchanges are using indices significantly more than they were before the financial crisis.

They are doing this for derivatives purposes, he explained, to trade options and futures.

He added that there has been a surprisingly large amount of interest from exchanges in Asia in particular to get access to these types of indices.

Common mistakes with indices

Since a lot of indices exist from a lot of different providers, Menon said a common mistake investors make is thinking that each index for a particular region or sector is identical.

Yet every index provider has its own methodology, he said, and some of these vary over time or by region.

In Thomson Reuters’ view, however, consistency is key. As a result, Menon said the firm has a rulebook which ensures that each one of the indices it produces is the same – regardless of the size of index by number of constituents.

Competing for market share

Given the large number of well-known and highly-respected brands already in the index space, it is challenging to come in as a new entrant, said Menon.

But he said the company has been clear to show how it differentiates itself. For example, it has a liquidity filter in place, and a classification scheme which is materially different. Plus, it has its own relationships with exchanges and a lot of access to data internally.

Future trends

According to Menon, the projected growth rate of the index business over the next few years is at least 10% to 15%.

When looking at exchange-traded funds specifically, the growth is between 20% to 30% per year for the next five years, he added.

This will set the stage for some innovative products, said Menon, not only on the passive side, but also in terms of some alpha-seeking indices.

Several thematic indices are also expected, he added, as well as a strong focus on emerging regions such as the Middle East, Asia and frontier markets.