Exchange-traded flexibilities
17th May 2017
The main challenge is developing a solution that is both flexible and scalable that can support ETF managers across various regions and asset classes, says Dominic Crowe of Citi
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What makes the needs of ETF asset managers unique? What kind of challenges do ETFs pose for service providers?
Every asset manager is unique, but in general there are nuances specific to exchange-traded funds (ETFs) that must be taken into account. From a service provider perspective, the main challenge is developing a solution that is both flexible and scalable that can support ETF managers across various regions and asset classes.
The one point that I would highlight is related to how new ETF shares are created via in-kind baskets. This feature of an ETF requires infrastructure that an ETF asset manager can either build or outsource to a service provider. There are certain cost advantages to leveraging the infrastructure and scale of a service provider. Following the global financial crisis, asset managers have come under extreme pressure to lower fees. This is evidenced by the large asset flows to lower cost products such as ETFs. Leveraging a service provider to perform ETF-specific functions gives ETF asset managers the ability to better manage operating costs while focusing on their core competencies.
How important, and how easy, is it to find people with specific expertise to service ETFs properly?
The ETF industry is still relatively immature, which makes it difficult to find folks that have five, 10 or more years of experience. As firms look to launch their ETF platform, it’s imperative to find seasoned professionals with prior experience before launching any product. Once the infrastructure has been established it becomes easier to source candidates that have general fund services experience. Having said that, I think the ETF industry affords tremendous opportunity for individuals that are looking to learn and join a dynamic industry that is growing at a rapid pace.
What kind of technology is required? Has the evolution of fintech made ETF servicing more efficient?
In addition to the core platforms required to support a traditional asset manager, ETFs require significant development to support the creation of ETF shares via in-kind baskets. The challenge with the technology is that it must be integrated with the existing core platforms and it’s difficult to implement a third-party solution. Our understanding is that most, if not all, service providers have developed their ETF solution in-house. This evolution has resulted in inconsistent capabilities. As ETF asset managers perform their due diligence, it’s important that they look under the hood to insure the vendor’s solution is scalable and customisable.
The evolution of financial technology has and will continue to affect the evolution of ETFs. Innovations will continue: technology will affect ETF product construction, trading and back office processing. The implementation of robotics, machine intelligence, data and analytics will be game changers for the entire investment lifecycle. Citi is committed to implementing these technologies and is making significant investments. We have established various fintech labs across the globe to drive our technology evolution.
Are you seeing an increase in the use of ETFs? Why, and is this putting a strain on service providers?
At the end of Q1 2017, ETFs and other exchanged-traded products registered record inflows, lifting global assets under management to $3.9 trillion. Our expectation is that investor preference for lower cost investment products will continue, which will greatly benefit ETFs. We continue to see an increase use across all investor segments. Specifically, we expect financial advisers, online platforms and retail investors to lead the global demand over the coming years.
As a service provider, we are excited about the continued success and development of the ETF product.
As the product continues to develop, it’s imperative that we continue to invest in our ETF platform to insure its market leading and scalable. Asset managers rightly expect seamless processing irrespective of volumes and we strive to deliver on that promise.
Every asset manager is unique, but in general there are nuances specific to exchange-traded funds (ETFs) that must be taken into account. From a service provider perspective, the main challenge is developing a solution that is both flexible and scalable that can support ETF managers across various regions and asset classes.
The one point that I would highlight is related to how new ETF shares are created via in-kind baskets. This feature of an ETF requires infrastructure that an ETF asset manager can either build or outsource to a service provider. There are certain cost advantages to leveraging the infrastructure and scale of a service provider. Following the global financial crisis, asset managers have come under extreme pressure to lower fees. This is evidenced by the large asset flows to lower cost products such as ETFs. Leveraging a service provider to perform ETF-specific functions gives ETF asset managers the ability to better manage operating costs while focusing on their core competencies.
How important, and how easy, is it to find people with specific expertise to service ETFs properly?
The ETF industry is still relatively immature, which makes it difficult to find folks that have five, 10 or more years of experience. As firms look to launch their ETF platform, it’s imperative to find seasoned professionals with prior experience before launching any product. Once the infrastructure has been established it becomes easier to source candidates that have general fund services experience. Having said that, I think the ETF industry affords tremendous opportunity for individuals that are looking to learn and join a dynamic industry that is growing at a rapid pace.
What kind of technology is required? Has the evolution of fintech made ETF servicing more efficient?
In addition to the core platforms required to support a traditional asset manager, ETFs require significant development to support the creation of ETF shares via in-kind baskets. The challenge with the technology is that it must be integrated with the existing core platforms and it’s difficult to implement a third-party solution. Our understanding is that most, if not all, service providers have developed their ETF solution in-house. This evolution has resulted in inconsistent capabilities. As ETF asset managers perform their due diligence, it’s important that they look under the hood to insure the vendor’s solution is scalable and customisable.
The evolution of financial technology has and will continue to affect the evolution of ETFs. Innovations will continue: technology will affect ETF product construction, trading and back office processing. The implementation of robotics, machine intelligence, data and analytics will be game changers for the entire investment lifecycle. Citi is committed to implementing these technologies and is making significant investments. We have established various fintech labs across the globe to drive our technology evolution.
Are you seeing an increase in the use of ETFs? Why, and is this putting a strain on service providers?
At the end of Q1 2017, ETFs and other exchanged-traded products registered record inflows, lifting global assets under management to $3.9 trillion. Our expectation is that investor preference for lower cost investment products will continue, which will greatly benefit ETFs. We continue to see an increase use across all investor segments. Specifically, we expect financial advisers, online platforms and retail investors to lead the global demand over the coming years.
As a service provider, we are excited about the continued success and development of the ETF product.
As the product continues to develop, it’s imperative that we continue to invest in our ETF platform to insure its market leading and scalable. Asset managers rightly expect seamless processing irrespective of volumes and we strive to deliver on that promise.
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