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Ensuring Data Quality in the ETF Market

On June 20, RIMES hosted its third Client Conference, in Boston. During the day, Dan Madden, Head of ETF Capital Markets at FlexShares Exchange Traded Funds, joined John Lanaro, Global Head of ETFs at RIMES for a fireside chat about the ins and outs of ETF data quality. What follows is a summary of the main points raised during their discussion.

Exchange-Traded Funds (ETFs) work by providing a wrapper around a set of securities. They are designed to track the performance of an underlying benchmark and combine the diversity of a mutual fund with the flexibility of a stock.

When looking at ETFs there are a number of things to consider: is the portfolio manager using a full replication strategy, for example, or are they using an optimized approach? How are they managing capital gains tax? And how are they managing turnover? This is one of the key benefits of working with RIMES when it comes to sourcing ETF data: not only can RIMES provide full data around the index being tracked, users can see all the holdings in a given ETF. This provides new levels of transparency.

From beta to alpha

One of the big changes to take place in the ETF market in recent years, is that they are no longer being only used for beta. Across both retail and institutional investing, there is interest in smart-beta ETFs and thematic ETFs, where the weightings are tied to factors beyond market capitalization. ETFs are therefore increasingly used to generate alpha, and can be found in a range of trading, hedging and, during rebalances, transition tools.

Data challenges

When it comes to the data challenges of the ETF market, the problem of fragmentation, so familiar in the index space, is again present. In addition to the data stored by custodians in the creation and redemption baskets disseminated through the NSCC (National Securities Clearing Corporation) process, each issuer also publishes its holding positions in a variety of formats and through a variety of channels; including websites, FTP sites and email.

If investors are to understand their true exposure under an ETF, they must understand all the data in the NSCC file as well as the issuer perspective. Considering the growing number of issuers on the market, there is a huge amount of fragmented data that needs to be sourced and quality assured. Unless this can happen, buy-side firms have no way of knowing their true risk exposure.

Achieving transparency

RIMES helps address this challenge by providing the data of full fund holdings in ETFs, so firms can see exactly what goes into the fund, in detail. RIMES also supports sell-side use cases by providing transparency into creation and redemption baskets. The key to both buy and sell-side use cases is the effective decomposition and ‘scrubbing’ of ETF data to ensure quality.

Such capabilities will only become more important as ETF data continues to grow in volume. With the Securities and Exchange Commission considering opening the market to customized creation and redemption baskets, it’s likely that there will soon be a greater number of issuers and ETF fund data to deal with. The role of companies like RIMES that work closely with issuers to gather and cleanse this data will be critical.

Contact us for more information on the RIMES Managed Data Services and how it can help you manage ETF data.

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