There aren’t many investment vehicles that can be described as evolutionary. The process of buying and selling stocks today hasn’t changed much in 200 years. Although we don’t stand in the market square and swap physical certificates of ownership, there’s still a market that matches buyers with sellers–though computers have made the process far more efficient. The same is true of bonds. And the structure of mutual funds hasn’t changed much since The Investment Company Act of 1940 was passed–though there have been some structural adjustments over the past seven decades.

Exchange-traded funds (ETF), on the other hand, continue to undergo an evolutionary process, a fact underscored by two interesting developments in the past week.

The first is the announcement that the venerable HOLDRs brand of ETFs will fold. At the time of their launch in 2001 by Merrill Lynch, HOLDRs were seen as the next step in passive investment. Formed as Grantor Trusts, HOLDRs were designed to be truly passive; they tracked a fixed basket of securities that rarely–if ever–changed.

But as a result of corporate restructurings, buyouts, mergers and outright closings, the baskets of stocks tracked by the HOLDRs have dwindled; at least one of the funds tracks just three companies. Investor interest in HOLDRs has waned and the fund line commands a tiny percent of ETF assets, with a $4.1 billion slice of a $1 trillion pie.

Although Van Eck will take over a few of the funds–and alter their structures–the rest are scheduled for liquidation later this year.

Given these funds’ tiny asset base, few investors will be directly impacted by the closure. But the move reflects an almost Darwinian process of evolution within the ETF industry.

The other significant development of the week was a Securities and Exchange Commission (SEC) filing by BlackRock–sponsor of the market-leading iShares brand–seeking regulatory permission to maintain proprietary indexes for ETFs.

Currently, the SEC requires most ETFs to track indexes run by outside advisors. There are only two sponsors–WisdomTree and Russell Investments–that are permitted to use their own indexes. But Wisdom Tree and Russell Investments are required to enlist outside advisors to maintain these indexes. BlackRock wants to handle all of those functions internally.

If BlackRock receives approval, the SEC will hand the firm a huge competitive advantage. BlackRock should be able to offer funds at a significantly lower cost than most sponsors. Additionally, the ability to offer funds based on proprietary indexes–which can be protected under patent and copyright laws–would allow BlackRock to offer indexes and strategies that can’t be replicated.

I’m not particularly enamored with BlackRock’s proposal. Although the firm could provide investors with more innovative offerings at lower costs, truly proprietary indexes seem like the first step on a slippery slope. I have no doubts that BlackRock would continue to be transparent in its operations. But a lack of head-to-head competition eliminates the incentive to strive for lower prices.

In the current market, index providers can license their indexes to anyone, which has exerted constant downward pressure on expenses since the dawning of the ETF era. That’s been a huge benefit to investors, who have seen expense ratios fall across the industry. Although costs aren’t the only concern for ETF investors, they’re among the most significant factors in total return.

The ETF industry will be monitoring the SEC’s decision very closely. If BlackRock is granted the exemption, it will mark a watershed moment for the industry.

What’s New

No new exchange-traded products were launched last week.

Portfolio Roundup

During the past week (Tuesday, Aug. 23 to Tuesday, Aug. 30) our Global ETF Profits Model Portfolio returned 2.7 percent compared to a 4.4 percent gain for the S&P 500 and a 2.3 percent gain for the MSCI EAFE Index. About 44 percent of our Portfolio is allocated to North America, which drove its outperformance relative to global indexes.

• IShares MSCI Japan Index (NYSE: EWJ) gained 2.7 percent last week, despite a political shakeup that saw Yoshihiko Noda become the country’s sixth prime minister in just under 5 years. Japan has struggled to cope with two decades of stagnant economic growth and a growing public dissatisfaction with its political establishment (sound familiar to anyone?). It would appear that a revolving door has been installed on the prime minister’s office. The markets have reacted favorably to Noda’s rise to power. He campaigned on a populist platform and styled himself as a man of the people. Although few market participants are optimistic that he can right the Japanese economy, the markets appear to have decided that he can’t make matters worse. Continue buying iShares MSCI Japan Index up to 11.