Matt Hougan, one of REP.’s "Ten to Watch" for 2012, has scheduled the full commercial launch of Index Universe’s ETF ratings system for the fall, when he’ll start aggressively marketing the system to broker/dealers and advisors.
The company started testing a prototype of the new ETF ratings and evaluation system in February 2011; they rolled out the commercial beta version in January of this year, starting with coverage of U.S. sector ETFs. Since then, Hougan has expanded their coverage to all equity ETFs, and he plans to launch ratings on fixed income, commodity and other types of ETFs this year.
The system is aptly named “ETF,” which in this case stands for "efficiency," "tradability" and "fit." These are the three areas in which Index Universe will rate a fund.
The effort, spearheaded by Hougan, took a while to get off the ground because the firm had to source the data from index providers and ETF issuers. His analysts also spent tens of thousands of man-hours cleaning the data, he said.
“It has been a frustrating process, as reaching for that level of quality slowed down our launch,” said Hougan, president of ETF analytics and global head of editorial for Index Universe.
Now that the data is up and running, Hougan aims to take the system out of beta and market it as a commercial product. But Index Universe has already started to more aggressively market the beta version. In the next couple weeks, for example, the firm is going on road shows to conduct in-person analytics workshops. They started in San Francisco on Wednesday, July 18. Other stops include Chicago on July 23, New York on July 25, Ft. Lauderdale, Fla. on July 26, and Denver, Colo. on July 31.
Hougan still faces the challenge of competing against the 800-pound gorilla in the packaged products analytics space—Morningstar, which rolled out a similar ETF analytics system early last year. Morningstar has a foothold on the advisor community by way of its mutual fund ratings.
Christian Magoon, CEO of Magoon Capital, an asset management consulting firm, said Index Universe system’s is differentiated from Morningstar’s because it was designed with ETFs in mind. Index Universe’s reputation, coverage, data set and relationships have centered around ETFs, he said.
“I think ETFs still haven’t hit that breaking point of ease of use, ease of analysis, ease of understanding,” Magoon said. “I think Morningstar did that in the late ‘80s with mutual funds, and Index Universe is poised to do that from an ETF standpoint.”
The challenge for Morningstar has been to make it an easy transition for somebody used to looking at their mutual fund reports, Magoon said. But there are a lot of different factors in evaluating ETFs, such as liquidity and tracking error, that aren’t applicable to mutual funds.
“Morningstar is a great company,” Hougan said. “It generally approaches the market from an alpha-seeking perspective, drawn from its history rating and ranking mutual funds. We take a completely different approach. We’re not going to tell you which fund will outperform. ETFs aren’t about outperforming their markets; they are index funds after all.”