As we celebrate 20 years since the founding of Morningstar Indexes, it is a good opportunity to reflect on the transformational growth of the index industry in the last few decades and where we may go from here.
Since the first index-based investment funds were introduced in the early 1970s, indexes have become an extraordinarily central part of investing and, in the process, have become a big business. With this growth has come the emergence of a huge array of market benchmarks that help investors track investment performance, and, even more consequentially, underpin investment products such as ETFs which have been at the heart of the passive investing revolution.
The index industry has spent 50 years fueling an investment revolution and, as a whole, now needs to change quite fundamentally to position itself for the future, or risk losing its relevance. The truth is that the industry’s recent record has been mixed. There’s a need for enhanced innovation, particularly in thematics, multi-asset and strategic beta. At Morningstar we’ve been at the center of much of that. There’s a need for more customization, so that the promise of direct indexing, enabled by technology, can reach mainstream investors. And above all, there’s a need for more competition, with a more diverse range of providers delivering better value for the investor.
We're showing investors of all hues that they have a choice and a voice in how they align with index providers
Industry competition has always driven better customization, choice and value for investors. And over the last five decades, index providers have been a catalyst for positive change. Yet, at present, index providers risk becoming victims of our own success.
From where we sit at Morningstar Indexes, we see little transparency around fees on the part of index providers. For example, most end investors do not know how much of the fees they pay go to an index provider. And we see unreasonably high margins for many index products, which are increasingly difficult to defend, especially in tougher market conditions.
While I can attest to the fact that the index industry is competitive, competition does not seem to be working especially well for the investor. It seems wrong to me that, after twenty years in which retail fund and ETF fees have more than halved, the percentage fee for the index data component of some ETFs has risen year-after-year. These data fees inevitably get passed on to investors. This phenomenon is not visible to most investors and has been hidden to some extent by rising markets and the stickiness these conditions can create.
We’re not complaining, and we’re not simply observing – we’re making our case day in, day out to investors and asset managers to provide an attractive alternative to the index industry incumbents. We’re showing investors of all hues that they have a choice and a voice in how they align with index providers.
We’re increasingly seeing a shift, both in broad market benchmarks as clients are realizing the opportunity for cost savings in a largely commoditized market, and in new areas such as thematics and ESG where clients are looking for more insightful research-led indexes that deliver better outcomes and fee structures that leave more money in the pockets of investors.
We’ve sought to reframe the client value conversation through our Open Index Philosophy, which is built on the concept that core beta should be inexpensive, strategic beta should deliver better outcomes and be reasonably priced, and both should be coupled with transparent, straightforward and predictable pricing policies. We constantly seek feedback and input into our approach, engaging with industry bodies and making the case for more transparency. Better interchangeability is also becoming the norm in many parts of the investment landscape, and indexes is surely going to be part of that secular trend.
When we look back in five years on our 25th anniversary, I fully expect to see a bigger, more diverse, and more competitive index industry with a more diversified and robust set of leading players. And I expect investors to be more fully reaping the benefits of this competition. That will be good for investors, and good for Morningstar Indexes.
Ron Bundy joined Morningstar in 2019 to help Morningstar Indexes pursue an aggressive growth plan. Prior to joining Morningstar, Ron spent fifteen years as CEO of Russell Indexes where he helped oversee a period of transformational growth for that global index franchise, then supported the combination with FTSE following the acquisition by the London Stock Exchange Group in 2015.