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ETFs and Transparency: Four Questions Institutional Investors Should Ask

The market for Exchange-Traded Funds (ETFs) is big business, with more than $5.5 trillion in assets invested at the end of June 2019 and expectations to reach and likely surpass $7 trillion by 2021. The flexibility of ETFs, relatively low management costs and their ability to deliver a diversified portfolio with ease make them highly attractive for several institutional investing applications.

As the ETF market continues to mature, timely and accurate exposure insight and monitoring will prove critical to maximizing the buy-side use cases and utility for these products. Without visibility of the nuances of all holdings within a fund, there’s a risk that a portfolio may include exposures that track well from a market beta perspective but behave differently under certain market stresses.

In order to stay ahead of this from an ongoing investment risk and compliance perspective, we have identified four key questions that every investor should ask:

  1. Is the ETF manager attempting to replicate the intended beta via physical or synthetic instruments?
  2. If the ETF manager is using stratified sampling, how do I understand my direct vs. indirect exposure to a given security, issuer, sector, etc.?
  3. What is my true economic exposure and risk at any given time?
  4. Does proxying my ETF with an index provide appropriate insight for ‘what if’ scenario analysis or stress testing considerations?

Buy-side firms will continue to engage on these questions and how the escalating interest in this space will impact their cross-functional stakeholders, clients and regulators. As you come to your own conclusions and response, having a single provider with relationships and connectivity across the ETF landscape of issuers can simplify your business solution and prepare you for future demand.

Contact us to find out how we can help you streamline ETF data capture, eliminate costly internal processes and enable daily exposure insight, aggregation and reporting. Read more about RIMES’ ETF data management here.

The content provided in these articles is intended solely for general information purposes, and is provided with the understanding that the authors and publishers are not herein engaged in rendering regulatory or other professional advice or services. Consequently, any use of this information should be done only in consultation with qualified legal counsel. The information in these articles was posted with reasonable care and attention. However, it is possible that some information in these articles is incomplete, incorrect, or inapplicable to particular circumstances or conditions. We do not accept liability for direct or indirect losses resulting from using, relying or acting upon information in these articles.

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