The increasing demand for ESG ETFs to have a genuine impact is leading to greater collaboration between ETF issuers and index providers.
According to research conducted by Cerulli Associates, the relationship between index providers and ETF issuers is changing with providers no longer wanting to simply track indices that are available on the market.
Highlighting this, UBS Asset Management partnered with MSCI to develop custom low carbon indices which the ETF issuer moved its entire SRI ETF range onto, ETF Stream revealed last December.
As Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli, said: “Traditionally, any manager launching an ETF would have to license the index it wished to track and then replicate it as an investment portfolio.
“However, the relationship between index providers and asset managers is changing, with some managers developing bespoke benchmarks in partnership with other companies.”
The index-tracking nature of the majority of ETFs means issuers are beholden to the views of the index provider once the strategy has gone live.
During ETF Stream's recent webinar on ESG ETFs, James McManus, CIO at Nutmeg, said the lack of divestment option for ETFs meant issuers need to bridge the gap between themselves and index providers.
“The gap here is index providers are not asset owners and the asset owners have to follow the index so it is a question of bridging that gap,” McManus continued. “Challenging index construction, having a higher tracking error or self-indexing are all areas that could be looked at.”
The collaborations come as ETF issuers have cooled their views on self-indexing. According to Cerulli, just 19% of ETF issuers surveyed expect to develop a self-indexing proposition while 57% see it as an opportunity.
“ETF issuers are cautious about self-indexing because benchmark regulations are in place to mitigate conflicts of interest,” Zumbo added.
