Growth demands dedicated data pipes, technology and infrastructure
Active ETFs are growing market share in equities and fixed income as investors seek out liquidity, often greater transparency and sometimes also tax efficiency. Part of the growth reflects mutual fund conversions including some multi-billion-dollar ones – but there is also plenty of organic growth and innovation with fresh active ETF launches from giant managers and specialist boutiques alike. Glamorous thematic technology strategies grab the headlines but ironically the operations and technology behind these products – wedded to flat files, excel sheets and clunky manual processes – is often lagging years or even decades behind the technology innovators that these ETFs invest in.
Quantifying the universe
The universe of active ETFs can include more galaxies. Active ETF managers can go anywhere in search of alpha, scouring the globe for equities, bonds, currencies, digital assets and derivatives listed in dozens of countries – so broader and richer data feeds are needed covering more geographies, time zones, market opening hours, sectors, sizes of stocks, sorts of derivatives, ESG criteria and liquidity metrics.
Ultumus is in the vanguard of this innovation, recently winning the mandate to provide daily PCF files for Fair Oaks AAA CLO ETF, the first European domiciled and Euro denominated ETF in the structured credit asset class that has garnered the biggest global inflows in the fast growing actively managed fixed income ETF space.
Data, calculation and support
Active ETFs raise the bar for operational wherewithal and tech savvy in terms of data pipes, calculation capabilities and coordinating support amongst investor service groups, the buy side and sell side. Systems designed for passive ETFs and relatively predictable index rebalancing schedules may lack the breadth and agility to meet the demands of active ETF. Just as racing cars need higher octane fuel, professional drivers, and masterly mechanics for speedy repairs at pit stops, active ETFs are forcing firms to review their ops and tech. A cosmetic revamp of legacy systems will not pass muster – a full-service partner dedicated to the ETF ecosystem and value chain is needed.
Real time and intraday
Active ETF portfolios change more often as active managers make decisions in real time, which demands real time data and intraday PCF updates. Active mutual funds are often run parallel to active ETFs, but the mutual funds only need to price and trade once a day, which means that asset managers and administrators launching their first active ETF may have a steep learning curve. Ultumus knows the ropes: as one of the world’s largest independent PCF calculation agents, Ultumus is well versed in refreshing dynamically changing customised baskets and monitoring PCFs daily, intraday and in response to corporate actions and other events. Systems need to keep pace with faster turnover without crashing or freezing – and this demands more of the smart API automation and straight through processing (STP) that Ultumus and its award-winning Cosmos creation and redemption solution are renowned for. Events such as intraday trading halts also need to be managed without paralysing the whole process.
Rising to the challenges: pricing, risk, liquidity and hedging
In some markets the largest amounts of trades go through at the end of the day and some ETFs can rebalance around this volume surge. But active managers naturally do not want to wait for the close before making their trades – and may well be trading during periods of shallower or intermittent liquidity. Intraday rebalancing thus creates extra work for pricing, risk management, liquidity monitoring and hedging for APs/market makers and asset managers/sponsors – multiple times per day. Firms need to stay ahead of the game and anticipate rebalances with detailed advance notices. This helps to coordinate the moving parts to engage with APs, capture trades and manage inventory appropriately. A delicate and intricate balancing act should avoid the blackouts, data gaps, hiatuses and outages that can force counterparties to widen out bid/offer spreads. Ideally rebalances can be automated – though a constellation of technical integration, signal standardisation, and latency factors needs to be orchestrated.
Controlling hidden turnover risks
Even if pricing and trading run like clockwork throughout the day the checks and balances do not end there. One danger is that all of this extra activity could inadvertently breach caps or ceilings on portfolio turnover, which need to be carefully monitored – but can allow overshoot in exceptional situations.
Settlement and clearing
A greater volume of trades also feeds into more intensive operational routines for settlement and clearing, which is now T+1 in the US and Canada – both for ETFs and their local underlying holdings. Ultumus has spent over a year handling the phase in of the new faster settlement period and can keep track of substantial order flow.
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