Russell Investment and the Next International ETF Wave

Further to Matt Hogan and Roger Nusbaum’s recent entries, let me ante up and note that Russell Investment Group has launched an onslaught of over 300 new global equity indexes, covering roughly 10,100 securities. Russell has further acknowledged that talks are under way to develop ETFs based on these new indices.

This move into globally oriented indices brings Russell toe-to-toe with MSCI whose iShares EAFE Index Fund ETF (EFA) and World indices have mass acceptance in the institutional space. To counter, MSCI has begun work to enhance its indexes and create additional benchmarks expanding its reach to roughly 98% of the world’s investable equity markets. This would match Russell’s coverage after the inclusion of their new indices.

So are we going to get hundreds of new ETFs linked to these new benchmarks? We won’t likely see new products for all of the new indices but we’ll see. I don’t believe that retail investors will want to have access to every country in Africa or central Asia (anyone interested in natural gas from Uzbekistan … I’ll bet there is!). But what about hedge funds? They are in the business of looking under every rock in every corner of the world. Certainly, hedge funds will have to expand further on a global scale and more significantly, into emerging markets. Within the ETF space, there is plenty of room for expansion in this area. There’s nothing specific for central/eastern Europe or the Mideast. What about Africa as a whole?

Perhaps it’s still early now, but hedge fund managers must be considering these areas if they have a global mandate. With hedge funds as significant users of ETFs, we will have to see just how realistic such a development is. The logistics are the problem. Will a market maker be able to provide the proper underlying requirements within the ETF structure in regions where capital markets are not as modern or robust? Hedge funds will find other means for exposure (private markets, etc.) but in time local market participants will surely do what they can to create locally domiciled ETFs to further their nation’s forward progression.

Keen ETF investors/observers should watch to see how new product development efforts continue in certain areas such as south-east Asia and other parts of the developing world.