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Growth of ETFs and Their Infrastructure Needs

Apr 06. 2015

Exchange traded funds (ETFs) have grown rapidly around the globe in recent years. Currently, around 2 trillion USD are invested in ETFs, and this number is expected to grow by 40 to 60 percent in the near term, as funds continue to flow into them from various regions, including Asia.

There are several key factors contributing to the rise of ETFs. As low-cost funds that hold broadly diversified portfolios of equity (local and cross-border), debt or real estate securities, ETFs combine the advantages of index funds and stocks. Like stocks, they are transparent, flexible, liquid, diversified and valued according to real-time prices and are also easy to use and can be traded in any quantity. Investors know exactly which securities are held by the fund at any given time and have continuous access to them. At the same time, ETFs provide the diversification, market coverage and low expenses of an index fund, and the majority of them use an index-based investment approach that tracks specific market or sector indices.

Together, these features of an ETF create a powerful investment tool that gives an investor the broad exposure they need at desired levels and times. As a result, they are building a strong reputation as an innovative investment solution, a claim that is further validated by their rapid growth. Additionally, the rapid proliferation of indices, styles and asset classes covered by ETFs (particularly country-related products, single-country exposure, regional indices and sectors) has also fuelled their rise in popularity.

As the scope of ETFs expands, the technology that powers them is becoming increasingly complex. The liquidity of ETFs and the degree of automated trading in the market are just two features that contribute to the technological complexity of ETF support. There are region-specific complexities as well. For example, cross–listings are a complication in Europe, while local regulations in Asia-Pacific require service providers to develop separate systems in every market.

To address these issues, technology providers have become integral to the ETF industry, providing the infrastructure necessary to reduce costs and improve liquidity, as well as meet increasingly complex tax and regulatory reporting requirements. From this perspective, it is not surprising that today’s market players are calling for more technological innovation in the ETF space in order to provide quality service to investors.

Overall, the rapid growth of ETFs presents an excellent opportunity around the development of innovative technology platforms, as well as investment in such solutions.

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