MV Index Solutions (MVIS, formerly known as Market Vectors), the index business subsidiary of US investment manager Van Eck, is targeting structured and exchange-traded products (ETP) providers as it moves beyond the exchange traded funds (ETF) market. SRP spoke to Thomas Kettner (pictured), managing director at MVIS, about the opportunities and challenges for smaller providers in the index-linked market.

Around US$13bn of Van Eck asset management's US$40bn in assets under management (AUM) are invested in financial products based on MVIS indices. According to Kettner, MVIS is not as well-known as other index providers because the initial intent, when Van Eck launched the index business in 2011, was to develop indices specifically designed to underlie the company's ETFs, but now the company is actively targeting third-party providers.

"We generally want our indices to be tradeable, so they can be used in index-linked products, such as structured products," said Kettner. "What differentiates us from other index providers is that our indices have been designed to be used in the ETF market. Regulation for ETFs is very strict and you need to have indices that are liquid. There are a number of broad benchmark indices out there that have very small and illiquid companies, which could cause problems in ETFs, both from a trading and regulatory perspective. We don't want to be in that situation."

There is a fundamental difference between, for example, an index-linked certificate and an ETF, said Kettner, adding that the focus has been on developing tradeable indices optimised for ETFs through diversification with very strict screens for traded value and volume of stocks, ensuring they would fit any ETF. "We want to expand our coverage and make our indices available to other ETF providers and the wider market," said Kettner.

Kettner is interested in expanding the company's presence in structured products, although noted that providers need to keep costs down, and so often resort to 'quick and dirty-type' indices. "Some index providers out there can deliver a very cheap index by running a few screens and filters," said Kettner. "The problem with this approach is that you get for what you pay. Our standpoint is different, because we have strong research and very high internal quality requirements."

Kettner is confident that this approach will eventually bear fruit and enable MVIS to have a breakthrough in the structured products market once providers realise that "the quality of the underlying index is just as important as the price".

While cheap access and exposure prevail, some providers, such as UBS, which has deployed the MVIS Mortgage Reits index in two leverage Etracs exchange-traded notes (ETNs), "are coming around and choosing quality indices, as opposed to the cheapest ones".

According to Kettner, being a small provider gives MVIS an edge in its capacity and speed to respond to requests. "Most of our business comes from in-house requests ,and we do a lot of research before we develop any indices," said Kettner.

The market for mainstream cap weighted indices "is pretty saturated" and you can only "add value if you find a very specific topic", he said. "Some of these indices are driving significant sales, but there's no incentive for smaller competitors to develop similar indices," said Kettner. "Having to pay a calculation agent (MVIS uses Solactive) is [also] a restriction for any index provider, [but] we cannot license our indices on the cheap and will continue to focus on quality. Collaborating with other firms has been successful in the past and is something we are considering for the future."

Most recently, MVIS has launched five equally-weighted equity indices (Germany Equal Weight, Japan Equal Weight, South Korea Equal Weight, United Kingdom Equal Weight, and Mexico Equal Weight). "While equally weighted indices are expensive to track, we can be more cost-efficient by focusing on highly liquid companies through our blue chip approach. Equal weight indices reduce concentration risk and have a more balanced diversification between components. Equal weight strategies tend to outperform market cap weighted indices, especially in rising markets. We think it is an attractive strategy for both providers and investors."

MVIS is also looking at other types of indices with volatility control features to add to its put write index and dividend concepts which could resonate with structured products providers. "There is also opportunity in the fixed-income segment," said Kettner, noting that ESG is also a "big topic".

According to Kettner, in order to succeed in the indexing market, a track record is vital and more important than backtesting. "Many people are wary of back-testing because it is not a particularly transparent process - you can't cross check historical selection lists and compositions," said Kettner.

MVIS was the first index provider to develop the pure play concept to define an index universe which other providers have now adopted. "The universe is the first consideration when building an index," said Kettner. "If we are building a Germany index, we would not only consider companies incorporated in Germany, but we would look at which companies derive their revenues from Germany."

Building such indices is more time consuming because you have to go through 50,000 tickers every quarter to see who does what and where, according to Kettner. "But we believe that the result are high-quality indices that better reflect the complexity of specific markets," he said.

MVIS' standard weighting scheme is also more comprehensive than the average weighting scheme used by other index providers, according to Kettner. "Some big market cap weighted indices for some special markets such as EM are overweighted on a handful of companies," said Kettner. "If a single stock makes 40% of an index, we don't think it's a good measure of the respective market. What others have done to address this is to apply cap factors to limit the weight of each component to 10% for instance, but our model is a staggered one where you can have an 8% weight for the biggest two companies, 7% for the next and so on.  This ensures the market capitalisation hierarchy is retained, but prevents a concentration in single stock."

According to Kettner, MVIS' indices also provide more diversification by combining a blue chip with a benchmark concept. Benchmark indices usually cover an entire market, including companies that may be small and illiquid, says Kettner. "While such indices work as a benchmark for a market, they might not work as underlying for financial products," he said.

Additionally, blue chip indices are more selective, as they cover the top companies of a market, which makes them good for investing, although they might not reflect the market as well as benchmark indices. "We apply strict size and liquidity criteria to define an investable universe and run a coverage approach afterwards," saidKettner. "In other words, our indices are selected by taking the investable part of a market with a benchmark approach. This approach provides diversification while focusing on the biggest (benchmark) and more liquid (blue chip) stocks."

SRP data shows that a number of Van Eck own ETFs have been featured in structured products of which 13 are still live products. The VanEck Vectors Gold Miners ETF has been featured in ten products worth US$12.34m.

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