UPDATE 1-ETF leader BlackRock files to run its own indexes

Fri Aug 26, 2011 4:59pm EDT

* Could result in significant cost savings

* Allows the firm to be more innovative with launches (Adds comments, background, byline)

By Aaron Pressman and Jessica Toonkel

NEW YORK/BOSTON, Aug 26 (Reuters) - BlackRock Inc (BLK.N), the largest manager of exchange-traded funds, has filed to create its own market indexes for its iShares funds, a move that could significantly reduce the firm's costs.

According to an Aug. 25 securities filing, BlackRock wants exemptions from portions of the Investment Company Act of 1940 so it can provide indexes for its own funds, as the Securities and Exchange Commission has granted to some other managers.

The move would be similar that of some smaller ETF managers like Russell Investments, WisdomTree Investments (WETF.O) and Claymore Investments, BlackRock said in its filing.

BlackRock, which has $632 billion of ETF assets under management, currently tracks indexes provided by other companies in return for licensing fees. McGraw-Hill Cos Inc's MHP.N Standard & Poor's and News Corp's (NWSA.O) Dow Jones are among the top iShare index providers.

BlackRock doesn't disclose how much it pays in licensing fees for its ETFs. But officials at competing ETF providers said that licensing fees can account for anywhere from 10 to 33 percent of an ETF's expense ratio.

In its annual report for its SPDR S&P 500 ETF (SPY.P), State Street Global Advisors Inc disclosed that it pays 0.3 percent in licensing fees to Standard & Poor's, while the total expense ratio for the ETF is 0.9 percent.

"If iShares is paying something similar, that's real money," said Tim Strauts, an ETF analyst at Morningstar Inc.

Christine Hudacko, an iShares spokeswoman, declined to comment.

Having its own indexes would not only allow BlackRock to introduce new products at a lower cost, but it would enable the firm to launch index-based products not available from current index providers.

"They can always go to an index provider with an idea and see if they are interested in doing it, but if they can do it themselves they won't have to worry about that process," Strauts said.

It is unclear if BlackRock would replace its current indexes with its own if it gets this approval.

"Institutional clients like those benchmarks," Strauts said. "If BlackRock does start replacing indices, I think they would start with the smaller funds."

Given the potential savings, it's only a matter of time before other major ETF providers such as The Vanguard Group and State Street Global Advisors Inc make similar moves, said William Thomas, former president of Grail Advisors LLC, an active ETF provider that was bought by Columbia Management Investment Advisers LLC earlier this year.

Joel Dickson, senior investment strategist in ETF research at Vanguard, said the firm has considered introducing their own indexes, but the firm has no current plans.

State Street has no current plans to launch its own indices, said Jim Ross, senior managing director at State Street Global Advisors Inc.

(Reporting by Aaron Pressman and Jessica Toonkel; Editing by Phil Berlowitz)

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