Today I thought I would provide a broader analysis of the Northern Trust NETS ETF filings. We'll bring Matt in here for some debate as well.

The Northern Trust ETF filing is big news in the ETF business. Only time will tell how big of a deal it is, but it's clear that they are entering the arena with serious intentions.  Matt and I have been bantering back and forth about this on our discussion boards. I thought I would pull some of that discussion out onto the blog.

Successfully goading Matt into joining the fray on the discussion boards, I titled the first post: "Hougan Missing the Real Story on NT Filing"  Here it is:

This story is so compelling that I'd like to up and post a blog, but will put in here. That Northern Trust filing FINALLY is a BIGTIME deal. But I really think Matt is missing the boat by putting all the emphasis on the global global (including US) fund.

That's a good investor story, and I do think a great development.

But the big STRATEGIC industry story here, is - look across the family - Steven and NT have scored a HUGE strategic coup of epic proportions. Look across the family. See any familiar brand names?

Do ASX, Hang Seng, FTSE Nareit, Topix, FTSE 100, AEX, CAC or DAX ring any bells?

That is a home run. Now they just need to fill it out with maybe the IBEX, BSE, OMX, SMI and a handful of others. Did they get exclusives a la iShares? I doubt it given particularly the European penchant for multiple licensees. But it certainly was a well executed (and I guarantee you labor intensive plan).

No wonder I've been seeing so little of Steven over the last year plus.

Congrats on this, Steven. It's very impressive. I had NO IDEA you were working on such an ambitious plan. NT will be entering the market with some real authority. Good hire by them I'd say. Now let's see how they do...

Matt counters in a jealous fit:

Hougan missed the boat? At least I found the FILING, Jim. Maybe if you spent some time at the keyboard instead of just lounging at the beach... It's a good thing at least one of us keeps an eye on the industry around here...

Of course, you're right about NTRS' filing. They've signed up some of the biggest and baddest indexes in the world. That's why I harped on the fact that these are the most important LOCAL indexes, and why I drew the comparison between the MSCI France Index and the CAC 40 in my expanded News coverage.

Here's the question, though: Does this translate into assets?

The "no" answer goes like this: First mover advantage rules. Period.

The "yes" answer is more complicated. It has a few facets:

First, "yes" assumes that big institutional investors will want to buy these indexes because they are familiar, or because they can trade liquid futures contracts against them in the local markets to create a hedged position.

Second, "yes" might also assume that some local players will be interested in these products, or at least interested in arbing them against local futures and derivatives.

Third, "yes" assumes that advisors and/or retail investors might want these "DJIA-style" indexes for foreign markets, because they are big names.

I don't buy the third point; I think the only funds with a shot at the retail market are the unique funds I highlighted in my story. I don't think many advisors know or care what the DAX or CAC 40 is vs. the MSCI benchmarks.

But points one and two are more convincing. I think the fact that there are liquid derivatives markets tied to these indexes (which there are not for MSCI products) could be a difference-maker.

I don't think these things will sink iShares. But I think they might cobble out a little room in the ETF marketplace.

I then offer this somewhat more civil response:

That's a nice follow-up Matt. You are pretty much on the issues here. There was a time in the ETF business when everything seemed open to possibility, but the bugaboo of historical precedent is now very clear to see in a number of issues.

The most overwhelming of those is first mover advantage. There is only one case I can think of where first mover advantage has been overcome in the ETF business...and that is in the commodities space, where the DJAIG iPath basically supplanted the PowerShares Deutsche Bank DBC fund and beat the GSCI index (both iShare and iPath) out of the gate.

In every other head to head (FITRs vs. Fixed Income iShares, GLD vs. IAU, IVV vs SPY all leap to mind), first mover, even if it's just by a month or two, has CRUSHED the latecomer, even when they latecomer would appear to have all the other advantages lined up with it. So there's never a rush of assets, but over time, quality, pricing, brand, marketing, etc. DO make headway. IVV is an example of that. Vanguard's funds are another.

On your point about institutional investors and the big international benchmarks, I think that's right - that's your obvious market. But the only thing is, there is a GREAT test case in this area to, and that would be the UBS (Fresco Shares - how's that for a blast from the past Darek and Joe?) launch of the STOXX 50 and EuroSTOXX...the two most highly traded and liquid index futures in Europe.

And what did they get? A couple hundred million total I believe. I just checked them, and I guess not surprisingly given the formula 1-like performance of european equities and the euro over the last few years, assets of the (now) SPDRs Euro STOXX 50 (FEZ) and STOXX 50 (FEU) are at 1/2 billion and 185 million each respectively.

Again, these funds were NOT first movers (Launched in 2002) The MSCI EMI (EZU) and iShares EAFE (EFA) were launched in 2000 and 2001 respectively and have $3 billion and (erp) $50 billion. How do you even explain EFA by the way? What a phenomenon...the QQQ of its day.

Drilling down in your post - call me cynical, but U.S. people are even more myopic than the rest of the world. And most people don't even know what the capital of Belgium is, or that they have waffles there, let alone that the BEL 20 is the market bellweather there. Even the CAC 40 or FTSE 100 mean nothing, I'd venture event to most advisors. So I'm not sure how much traction you get there...but maybe with a few sales guys.

So where does that leave us with the Northern Trust funds? In a world-beating money gathering factory position? No. In a very interesting position? Yes. I think the brand gathering strategy is a good one, and what I would have done. But I would also absolutely look at building out the family in the more "smart investor" quant areas if I were them, maybe using the DJ Wilshire global they've started with as a base and then opening into the size and sectors space in the way that DFA has done in a systematic, cohesive way.

Ultimately, I think that is where it's at for longterm dedicated assets - having an iShares-like interlocking family. But there's nothing wrong with having MULTIPLE families (heck iShares has them all). And bringing in the big brands is just smart would be my plan.

But now if they're REALLY serious about the ETF business, the real work begins NOW.

And the bigger questions will be how do they position themselves in terms of branding, pricing, end-user, etc. I like their chances to give it a go with Steven, and it is an impressive start.

Resident  loyal reader Ira Artman then contributes:

Importance of NT's filing - Eat their own cooking

Recall that one of the "unexpected" impacts of VG ETFs was the extent to which the VG funds made use of their own ETFs.

NT probably can justify offerings as basis of investments to be offered to their own high net worth, private banking clients (in addition to any non NT clients?)

This would allow them to deliver "in house" solutions that keep larger part of fees in house (relative to their bank competitors, who would be using Barclays, SPDR, et. al. products)

Now I conclude this blog:

That's a great insight from Ira...and I would extend it to say that there are a lot of large institutions who bridle at the thought of using their trading and sales infrastructure to effectively raise assets for their direct competition like SSgA and BGI.  In effect, many of these companies are getting one-time brokerage payments and handing their competition an annuity (in the form of the fund's expense ratio).

That may be part of what drives more of these players into the ETF area.  It will be interesting to see how the business continues to develop.