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By Alastair Kellett | 02-04-2013 09:00 AM

Creating Specialised Indices for ETFs

Not all ETFs and indices are created equal. Find out all about the process of index creation from Ossiam's Isabelle Bourcier

Alastair Kellett: We've been talking recently about self-indexing ETFs. That is cases where an ETF, instead of tracking a third-party index like from S&P or MSCI, tracks its own internal index. It's a practice that has the potential to introduce some conflicts, but also the potential to reduce costs for investors.

In a recent article, I incorrectly labelled Ossiam as a firm that employs self-indexing. I am joined today by Isabelle Bourcier of Ossiam to talk about why that was inaccurate. Isabelle, thanks for joining us.

Isabelle Bourcier: Thanks for having me.

Kellett: What's the difference between what Ossiam does and what is traditionally thought of as self-indexing?

Bourcier: Yeah. What Ossiam does is work jointly with index providers to develop new indices. The firm has ongoing research capabilities, which are strong and which we use in order to develop new indices with index providers. The way we work is we go and see an index provider, we explain our investment process, and we transpose this investment process into a pure rule-based index, which is going to be calculated and displayed by an independent index provider.

And in the case, for example, of the FTSE 100 Minimum Variance, it's an index that completely belongs to FTSE. We've been working with FTSE to develop this index, but the index is fully run by FTSE.

Kellett: So, for example, is it possible that other ETF providers could then create a product that tracked that index?

Bourcier: Exactly. Anyone can replicate this index. FTSE is providing the same level of information as they would do for their standard indices. Methodology is public. The data is available as for a standard index. And if an investment bank wants to create a certificate and note a structure product on this index, they can do so. If FTSE wants to license another ETF provider on this index, they can do so.

Kellett: After the index goes live, what's the process for making any changes to the methodology? Does Ossiam still have a role in that?

Bourcier: Well, Ossiam can [make suggestions]. We run ongoing research about new generations of indices, what is called ‘smart beta’ indices. So if we thought that there would be announcements to make to the index, we could go and see FTSE, and say, ‘okay guys, we think that would be a way to enhance the index’ and it would be up to FTSE to decide what they want to do, whether they want to make the modification, whether they want to consult the investors before they do so.

Kellett: They would have the final decision.

Bourcier: Exactly.

Kellett: Given that you've got the resources in-house to develop indexes, why did you decide to work with third-party index providers instead of just retaining the ownership over the indices?

Bourcier: So, we are an asset management firm. We have research capabilities linked to the background of the investment and research team, which is very quantitative, very mathematical. However, it's not our role to manage an index. I think it needs an infrastructure, which is very specialised, very specific with strong data history that enables you to provide appropriate information to investors and strong infrastructure to deliver this information to investors and to market practitioners. This is not our role. Our role is to manage funds and to be innovative and work on this innovation with index providers.

Kellett: Great. Thanks Isabelle.

Bourcier: Thank you.

Kellett: That's all the time we have. You can read more about this topic on Morningstar.co.uk.


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