Just a quick note on what could be a profound change in the way the ETF industry works. Olivier Ludwig at IndexUniverse reports that Blackrock ($BLK) owner of the iShares ETFs has filed to become an index provider. In so doing they have upped the ante on what it takes to be a player in the ETF industry. I am surprised that this story has not gotten more play in the financial media.
Right now most ETF provider license the indices they use that underlie ETFs from outside providers. Blackrock is now changing the game by moving to an in-house index model. It will be interesting to see if and when they move to switch over the indices for some of the world’s largest and most popular ETFs. Ludwig writes:
If iShares chooses to segue to its own indexes on existing funds, the effects would reverberate widely in the U.S. ETF industry. After all, the firm now has almost $430 billion in ETF assets, according to data compiled by IndexUniverse. It didn’t shed any light on its long-term intentions in the filing.
If I were in the index business I would not be a happy camper today. This business has been quite lucrative for the index providers as assets under management in the ETF industry have swelled.* If Blackrock is going to take their index business in-house, you can bet that other firms will seriously contemplate doing this as well.
At the same time it is widely believed that more firms will join the ETF fray in anticipation that actively managed ETFs will eventually take off. It will be interesting to see if this move by Blackrock into the index business is part of a broader strategy that take into account the active ETF side of things.
*See an earlier piece by The Reformed Broker on the wacky ETF index business.
Updates: Ian Salisbury at WSJ picks up on the story and explores some of the reasons why Blackrock is making this move. Miles Weiss at Bloomberg provides some additional detail on why the SEC is concerned about in-house index providers.