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Managing the ETF Data Challenge: A RIMES Q&A

It’s boom time for Exchange-Traded Funds (ETFs). ETF assets, which are traded like stocks and usually track an index, have swelled to $5 trillion globally, up from less than $700 billion prior to the 2008 financial crisis.

However, ETF products bring with them a unique set of data challenges that pension funds, asset managers and other investment firms need to manage. We caught up with Silas Odeke, Sales Engineer at RIMES, to hear more about the data challenges firms face, and what RIMES can do to help.

Q: Why are ETFs proving so popular?

Silas: There are a number of reasons, but one is related to the fee structure for ETF products, which is typically less than for mutual funds; as there is much less active management involved. I also think that investors see ETFs as a good way to diversify and mitigate risk.

Q: How do ETFs work?

Silas: ETFs are investment funds that are traded on the stock market and which track a given benchmark. They are bought and sold at their market price, as opposed to the NAV, and like stocks they may fluctuate in market value and trade at prices lower (discount) or higher (premium) than their NAV.

ETF managers make block transactions to keep the fund close to the benchmark it’s tracking, but sometimes may need to diversify the portfolio in order to minimize tracking error variances. The security acquisitions for these block transactions are handled by Authorized Participants (AP) who are large institutional investors; such as large banks like Morgan Stanley, JP Morgan Chase and Goldman Sachs among others.

Q: And why is data management so important?

Silas: Data management is particularly important when institutions have to manage their risk exposure to the holdings within an ETF in order to ensure they are compliant with either client mandates or other industry regulatory requirements. The best practice approach to data management helps institutions maintain better control around their data licensing challenges especially with the rising costs associated with data procurement in the market.

Q: What challenges are you seeing around the management of ETF data?

Silas: The main challenge is around the depth and quality of data available to firms. It varies across the value chain. For the fund itself, issuers, distributors and/or custodians need to disclose top-level numbers, such as assets under management and fees. At the holdings level, meanwhile, at a bare minimum, they are required to make the portfolio composition and weightings of the portfolio available in the public domain. When it comes to the benchmark that’s being tracked, the expectation is for much more holistic data, including information such as prices, identifiers, benchmark calculation methodologies, error correction management, and so on.

Since a similar level of disclosure is not required from ETF portfolio managers, firms can find it difficult to validate ETF data against benchmark data. There are often assumptions that the ETF validations will match up against the benchmark – but this isn’t always the case. ETFs can be complex since they’ve changed over time as portfolio managers have sought to keep within sight of the benchmark being tracked by, for example, introducing cash or other derivatives into the portfolio, taking long- or short-positions, or diversifying their weightings. This makes data consistency a challenge within the ETF market.

Q: How can RIMES help?

Silas: We’re doing what we always do: leveraging data partnerships to provide firms with the high-quality data they need to make the right decisions for their clients. When it comes to ETFs, we’ve put in place partnerships with a variety of data aggregators and ETF issuers and continue to expand daily on this offering. We’re doing all the data ‘heavy lifting’ in much the same way we do with benchmark data in order to be able to provide feeds that are fit for purpose and ready to interface with clients’ in-house systems.
Data enrichment is one of the key value-adds we can give clients. We supplement the item types available from our Data Partners by, for example, leveraging market identifiers from benchmark sources and market providers in order to offer security identity mastering, or by providing pricing enrichment for underlying holdings among others.

Q: What ETF data is covered by RIMES’ Managed Data Service?

Silas: At the moment we are providing settlement date-based data on ETFs and are working toward eventually offering trade date-based views including creation and redemption baskets. We are also engaged in talking to our clients about ETFs and how RIMES can offer enrichment services for this data based on end user requirements.

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

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