Reid Steadman of Standard & Poor's explains the role and application of indices in the construction of ETFs, as well as looking at trends in licensing.
Date: Oct 2011
These indices can also be used as model portfolios, to create ETFs and other investment vehicles, he explained, so the firm works with ETF sponsors who take the indices and essentially use them as recipes for creating a new fund.
The firm also licenses its marks, said Steadman, with the name of a particular ETF including the S&P label to enable investors to identify which index the ETF is tracking.
Steadman said the firm differentiates itself in Asia in terms of its service and flexibility. For example, ETF sponsors come to S&P with good ETF ideas, to work through how to put them into index form.
In the early days of ETFs, Steadman said sponsors would look for pre-existing indexes and get a license to use that index. Now, he said there is much more consultation and development of a concept to create a new product and value proposition for ETF investors.
An index can be used in a few different ways, said Steadman. For instance, a popular way to use an index is to simply use it as a benchmark, so an active manager might have a mandate to try to beat the performance of an index, even if this has proven to be difficult to do.
Indexes are also used for passive management, which is their most popular use, to replicate the performance of that benchmark.
The general interest in ETFs has increased overall in Asia, said Steadman, with ETF sponsors looking to enhance knowledge sand take-up of the product.
Although it will take a while for the ETF asset to come, Steadman said this will definitely happen, so it is imperative that the ETF sponsors have their products available in the market when the assets start to flow.
Recognition of indexes
In Asia, Steadman said most investors know the headlines indices, and these have been widely used for some time.
There is also an increased level of sophistication in terms of recognising different ETFs that are offered across the region and also globally, he added.