As fund providers look to trim costs and attract investor interest in a quickly growing—and quickly crowding—ETF space, it seems more and more firms are looking into self-indexing as a way of cutting the costs associated with licensing benchmarks for ETFs from third-party providers.

But the lure of a possibly lower price tag can hide the dangers that come with throwing index management and ETF sponsorship into the same pot, Alex Matturri, CEO of S&P Dow Jones Indices, recently told IndexUniverse’s Correspondent Cinthia Murphy. And that’s not to mention that in the race for investor dollars, giving up index brand-name recognition can be the costliest mistake of all.

In our ongoing examination of self-indexing, we've already featured a Q&A with Steffen Scheuble, the head of Germany-based indexing firm Structured Solutions AG, and later we'll publish a Q&A with WisdomTree Chief Executive Officer Jonathan Steinberg, who will provide a spirited riposte to Matturri's views.

Murphy: Some ETF providers like WisdomTree, IndexIQ, Van Eck and most recently BlackRock, Guggenheim and FlexShares have either jumped into or are looking at jumping into the business of self-indexing. What do you make of this apparent trend to cut the middleman out of the ETF business structure?

Matturri: It’s a trend in filings. It’s just people talking. But if you look at asset flows, they are predominantly going into well-known, well-branded index products. Product providers and investors in general are comfortable with the transparency, the brand they’ve come to know, and that’s true across all industries, not just financial services. Most anyone can create an index of, say, 500 stocks, but it won’t have the same governance, client support and brand architecture of the S&P 500.

Murphy: Is the potential for conflict of interest or index manipulation to benefit ETF performance a real problem here? What do you see as some of the pitfalls in self-indexing?

Matturri: There is a major potential for conflict of interest. When you have banks calculating an index and using that same index in products—like in the Libor—you have a major conflict of interest there. And now it’s a huge scandal.

I understand fund providers are trying to cut costs, but self-indexing self-defeats the idea of an ETF as a transparent product. The brand associated with an index is important. It gives the investor knowledge of the process, of the role of the index provider—we are not a product issuer—and it takes away the issue of conflict of interest.

The ETF business has done remarkably well because of its traits such as transparency. Self-indexing takes some of that away. The transparency isn’t the same.

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