The editors at Money Management Executive spoke with Joseph Keenan, managing director, global financial institutions, BNY Mellon Asset Servicing, on the future of exchange-traded funds.

MME: What are the biggest trends driving the ETF market right now?

Keenan: There is continued interest among potential entrants into the ETF space, primarily established, large traditional mutual fund companies and other asset managers. They have witnessed the tremendous asset gathering potential of ETFs and are trying to figure out what the appropriate strategy would be to enter the market.

I am certain that some of those firms are looking at the existing providers to see if they are potential acquisition targets. Others are looking to build their own families of ETFs both here in the United States and globally to capture some portion of the anticipated growth of the ETF market going forward.

Established asset managers want to develop an ETF strategy not because they think they will cannibalize other products but that they are clearly a structure that appeals to particular distribution channels. Up until this point, for the first 20 years of the ETF industry, ETFs were primarily seen as trading vehicles. This has absolutely changed over the last several years. ETFs are now viewed as ideal tools for portfolio construction. As a result, they now also appeal to retail investors and fee-based planners or Registered Investment Advisors. Thus, ETFs have simply become another arrow in asset managers' quivers for their wholesalers.

Meanwhile, existing ETF providers are looking at either launching and/or distributing ETFs in new markets, whether it be in Asia/Pacific, Europe, Middle East, Africa, Mexico or Latin America. They want to identify where they can expand their franchise-as well as their offerings-and hopefully capture the international growth.

MME: At the "Super Bowl of Indexing" conference, you are appearing on a panel on "Growth and Evolution of ETFs: A Global Explosion of New Indexes." What are some of the new indexes you plan to talk about?

Keenan: The demand for passive products has driven extraordinary innovation in indexing over the last several years, from fundamental indexing, to using different weightings beyond market cap, to creating indices to serve as a benchmark for an investment vehicle, as opposed to the other way around. In the 1990s, ETFs were built around existing indexes that were logical benchmarks for potential products. Now, because of the tremendous interest in ETFs, traditional index providers such as Dow Jones, MSCI, S&P and FTSE and other institutions, including BNY Mellon with our ADR indices, and Morningstar, are creating new benchmarks that could be ideal for the development of new ETFs and other investment products.

For example, our client WisdomTree developed its franchise on the concept of dividend-weighted indices. Our client PowerShares has fundamentally weighted products based on indices developed by Rob Arnott. Our client RevenueShares takes traditional indices like the S&P 500 and revenue-weights them as opposed to using a market-capweighting methodology. Our client Direxion has a family of triple beta funds that use leverage, which is optimal for short-term trading as opposed to long-term buy-and-hold investing.

For instance, Dow Jones recently introduced a series of venture capital indices that measure the changes in the value of venture capital-financed companies. That's a very interesting and novel way of getting into what could potentially be a very high-growth space.

NYSE Euronext has been very aggressive in expanding their own indices to extend their brand. There's a whole variety of indices they are offering. The index business has morphed to look at the market differently, which creates great potential for ETFs and other products. Morningstar has developed a range of indices, including an entire family of asset allocation indexes with either targeted maturities or a targeted risk approach.

MME: How does this innovation affect BNY Mellon as a service provider to ETF clients?

Keenan: We need to be able to be very flexible and respond to innovation, so that as new indices are developed, we try to anticipate the types of new products that could be linked to those benchmarks and solve accordingly.

MME: How are you trying to educate institutional investors on the use of ETFs?

Keenan: As leading provider, we work with about two dozen sponsors of ETF products in the U.S. Globally, we work with over 30, and we have a number of firms that are about to enter the space that we are hope will work with BNY Mellon as their service partner. We feel an obligation not only to our clients and prospective customers but to the industry broadly to educate underlying investors.