Index Disruption: The Promise and Pitfalls of Self-Indexed ETFs

Abstract

Self-indexed ETFs, which track indices created and maintained by ETF issuers themselves, rather than relying on external index providers, are disrupting the index provision market. By avoiding licensing fees to independent index providers, self-indexed ETFs are expected to offer competitive fees for investors. Surprisingly, we find that self-indexed ETFs often charge higher fees than their public-index counterparts. This disparity cannot be explained by product differentiation but rather by conflicts of interest. ETF issuers which offer both self-indexed ETFs and wealth management services are incentivized to promote their own high-cost self-indexed products to clients. Increased competition is not always a panacea for end-investors. Joint paper with Sida Li and Anthony Limburg.

Keywords: ETFs, benchmarks, index providers, self indexing, indices, mutual funds, financial intermediation

Link to paper.