ETF Transparency Demands High-Quality Data

The Exchange Traded Fund (ETF) market is already vast, and it is expected to get bigger – potentially reaching $7 trillion in global assets by 2021. While ETFs are often associated with passive investment management, tracking an underlying index, there is evidence that active investment managers are increasingly attracted to the business growth opportunities attainable via the ETF market.

Actively managed ETFs work in the same way as passive ETFs from a mechanics perspective, with the significant difference being that managers are applying top-down and/or bottom-up allocation or strategy decisions relative to the corresponding index. Actively managed ETFs, as a product, can be considered to fall in-between passively managed ETFs and actively managed mutual funds. They provide the flexibility and ease of trade of the former while opening up the possibility of greater than index returns provided by the latter.

It was originally thought that the transparent nature of ETF wrappers would make the market unappealing for active managers, as involvement might reveal too many real-time clues to their investment methodologies. However, as revealed in a recent interview with the Co-Head of ETFs at PGIM, a top 10 global investment manager in terms of AUM, active managers are becoming more comfortable with the requirement to disclose their holdings on a daily basis. While active ETF managers are attracted to the potential asset growth and brand exposure, this evolution is largely due to investors, who are increasingly demanding transparency when it comes to their investments.

For managers who are leveraging and utilizing these active ETF funds as part of their portfolio allocation process, having sound data management processes is key. These institutional investors and asset allocators using active ETFs need not only to be able to view and track exactly how the overall fund is performing but also require insight to the exposures of the underlying constituents. If managers are to identify and source alpha opportunities and/or hedge risk effectively, they require access to the highest-quality and timely data, and that ultimately means being able to access data directly from ETF issuers.

“Given the range of ETF issuers and product offerings being utilized in the portfolio construction process, establishing robust data management capabilities that can ingest, normalize, validate and potentially enrich this data is a considerable challenge” stated Brett Schechterman, Head of North America Product at RIMES Technologies. “It is therefore essential that active managers utilizing ETFs find a credible data partner to help in this task, ideally one that can do the heavy lifting so that this content is ready for consumption throughout operational systems. Doing so means active managers can rest assured they have the best data possible upon which to base their portfolio allocation, risk management and/or hedging decisions, while also being able to provide the levels of transparency their clients increasingly demand.”

RIMES will be discussing ETF data and other key topics relating to financial data management at its Client Conference on June 20 in Boston. Register now, or contact with any questions.


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