A top index provider is considering offering its own lineup of exchange traded funds, but just what those funds would look like is a mystery.
A top index provider is considering offering its own lineup of exchange traded funds, but just what those funds would look like is a mystery.
Russell Investment Management Co., a unit of Russell Investments of Tacoma, Wash., applied July 2 for permission from the Securities and Exchange Commission to offer ETFs.
The filing contains little information about what kind of ETFs Russell would offer. The company declined to provide more details.
“We are evaluating additional opportunities in the ETF market on a global basis and have filed an application for exemptive relief with the [SEC] as part of our exploration process,” Steve Clairborne, a spokesman for Russell, wrote in an e-mail.
“Successful completion of this process will provide Russell with the option to manufacture its own active and passive ETFs and/or provide investment content to ETF sponsors,” he wrote.
It is the possibility of passive ETFs, however, that immediately raised eyebrows.
Russell indexes are already the basis for 13 iShares ETFs distributed by Barclays Global Investors of San Francisco. BGI pays Russell a licensing fee to use its indexes.
Therefore, it is a safe bet that iShares won't be too pleased if Russell comes out with ETFs based on the same Russell indexes as its own offerings, said Scott Burns, director of ETF analysis at Morningstar Inc. of Chicago.
Offering ETFs based on its own indexes would make it easier for Russell to undercut iShares on price, he said.
“There may be some very upset people,” Mr. Burns said.
No one from iShares was available to comment, said Christine Hudacko, a spokeswoman for the business.
If Russell does come out with ETFs based on its indexes, it may have a hard time winning the business of financial advisers.
An index provider that is also the ETF provider raises questions as to whether an index may be manipulated to meet the needs of a particular ETF, said Tom Mench, chairman and chief investment officer of Mench Financial Inc., a Cincinnati-based advisory firm with $200 million under management.
“I'm more comfortable where there is some sort of check and balance,” he said.
Of course, there are other ETF providers — WisdomTree Asset Management Inc. of New York being the most prominent — that follow indexes that they have created without any problem, said Jim Lowell, editor of the Forbes ETF Advisor, a monthly newsletter based in Needham, Mass.
The potential issues, however, are many for Russell, he acknowledged.
It seems a little more likely that Russell will focus on actively managed ETFs, said Mr. Lowell, who, in addition to editing the ETF newsletter, is a partner and chief investment strategist at Adviser Investments Management Inc. of Newton, Mass., which manages more than $1 billion.
“If they do move into the active ETF space, and they do it correctly, that could be their market in much the same way iShares dominates the index side,” he said.
‘CRUSHABLE' COMPETITION
That is because actively managed ETFs are offered by startups that are “crushable,” Mr. Lowell said.
Russell, on the other hand, is an established asset manager with more than $136 billion in assets.
Of course, as an established player, it could be argued that Russell doesn't need to offer ETFs.
Russell, however, may be preparing for a new investing world, Mr. Mench suggested.
In June, New York's BlackRock Inc. agreed to buy Barclays Global Investors from Barclays PLC of London for $13.5 billion. The deal is expected to close in the fourth quarter.
With its acquisition, BlackRock will be the world's largest money manager, with a stunning $2.7 trillion in assets under management.
It will have a tremendous advantage in the investment management industry and Russell's move may be an attempt to blunt that advantage, Mr. Mench said.
