ETF service providers play a key part in facilitating the primary market process through their roles as transfer agent, fund accountant and custodian for the ETF. The service providers develop ETF servicing platforms which reduce cost and remove uncertainty from the primary market, help Authorized Participants in their role as liquidity providers and arbitrageurs and ultimately reduce costs for investors.
In the growing area of ETF servicing, it is important to know who the players are, how they stack up and what to look out for in terms of platform, administration, custody, distribution, and trading services.
Each provider will have its own strengths and weaknesses that would need to be weighed differently according to your organization’s specific needs.
At minimum ETF service providers should have:
- A global ETF service with automated capabilities covering the ETF lifecycle
- ETF market insight and expertise
- Basket creation and dissemination, including custom and index baskets
- Streamlined facilitation of ETF orders between ETF providers and brokers via secure interface
- Timely and flexible reporting through online dashboards
- An experienced client onboarding team to help get you to market quickly and efficiently
- Integrated single-provider capabilities, from custody to fund valuation, from ETF services to securities lending
Here are a few key areas to consider and questions to ask when selecting a provider:
Platform and Scalability:
- Is their ETF platform fully integrated with their custody, accounting, and transfer agent?
- Do they provide real-time access to pricing and positions and cash?
- Is the technology used customizable, scalable and cloud connected?
Breadth of Service:
Do the provider services include custody, depositary, accounting, portfolio composition file services (‘PCF’), administration, authorized participant servicing/ order taking, FX, and securities lending?
Product Support
- What ETF products will the provider support?
- Will they cover the full realm of ETF products? i.e. physical, synthetic, exchange traded, active, semi-transparent, passive, and quantitative ETF strategies across equity and fixed income global markets?
- What about leveraged, currency hedged and commodity ETF products?
Product Expertise
Does the provider have the right ETF expertise on hand to provide guidance, and co-develop ETF products, and advise?
PCF Production
- How robust is their PCF creation process, are there safeguards, error checks?
- Can it support different formats and interoperability?
- Is it accurate and timely in its projections?
Order Taking
How stable, efficient, and flexible is their order taking portal or user interface?
Cost
Are their prices competitive? What is the service provider’s contribution to the total cost of ownership (TCO) of issuing and managing ETFs compared to other providers?
Other aspects you may also want to consider:
Implementation
Now you’ve chosen your ETF service provider, how good are they at implementing the service?
Will it be easy or complex, and will the provider have a dedicated team? What level of service will you get?
This is crucial to gauge ahead of time as it will likely be indicative of future ongoing service delivery.
What kind of testing will they offer? Will they supply one or more weeks of test data and data files to mimic an actual day in the life?
Data Management and Future Scalability
You may also need to consider where you think your ETF journey is heading and how you would like to integrate it into your architecture.
Ideally you do not want to build a new and separate infrastructure to support your ETF business in isolation, this would be costly and possibly not scalable.
Your ideal overall target state tech architecture should prioritize reducing point-to-point integrations, this can be achieved by establishing a data virtualization layer to consolidate and disseminate data within the organization. You may want to consider data-lake and virtualization layers, employing extract, transform and load architecture as an industry best practice to consolidate all data feeds from the ETF provider and virtualize for downstream consumption.
Other Data Recommendations
- Modernize your interface protocols converting from SFTP to API based integrations from Data Virtualization layer to your downstream platforms
- Streamline your interface architecture, to reduce the number of integration points between Client and Service Provider and lower the risk of issues / errors
- Utilize virtual data storage to support archival of key data sets e.g., PCF, Confirmations, Approvals as well as any reporting, while any Data Virtualization vendor should be assessed for Write Once Read Many (WORM) compliance
If you are interested in getting any help with your ETF program, please reach out to Alpha via email and we can assist you in your journey to selecting the right ETF service provider.
About the Author
Natalie McIntyre
Director, Head of Technology Service NA
Natalie is a member of the North American Management Committee and Co-leads the Data Science & Analytics practice. Natalie is a subject matter expert who has supported retail and institutional clients and has led programs across business strategy, distribution, investment ops and M&A due diligence. Most recently Natalie has focused on supporting clients with innovating their US retail wealth and advisory strategy and leveraging technology and data to accelerate change in investments, operations and distribution. Prior to Alpha, Natalie worked at a Bridgewater Associates.