Exchange Traded Funds (ETFs) offer many advantages as an investment vehicle. So much that many organisations, whether by preference or regulation, choose to primarily or exclusively invest in ETFs, ETCs and UCITS Funds instead of individual equities, commodities, or futures contracts. However, challenges can arise when holding multiple funds that may have overlapping holdings or elements that amplify instead of diversifying risks to the overall portfolio. When managing a large portfolio that includes a variety of ETFs, it is important to be able to dive deeper into the holdings of each fund to determine risks.

According to leading independent research and consulting provider ETFGI, global assets invested in ETFs and related products reached US$8.3 trillion at the end of February 2021.

   Source: ETFGI data sourced from ETF/ETP sponsors, exchanges, regulatory filings, Thomson Reuters/Lipper, Bloomberg,    publicly available sources, and data generated in-house.

Disaggregating ETFs with spreadsheets

With typical portfolio management tools, your investment accounts would calculate your value at risk based on historical behaviour of the ETFs that you own and the information provided by the fund manager. However, even funds targeting the same index, sector, or market can use different structures, weighting methodologies, and concentrations. To find out exactly what your portfolio’s exposure is, you could track down the current holdings of each ETF and build a spreadsheet that translates your ETF shares into the corresponding amounts of the underlying component stocks. Then you could run your risk calculations against the detailed contents of your portfolio and see if there are any significant outliers. Of course, every time the ETF changes its holdings, you would need to update the spreadsheet and rerun the risk models.

Dynamically disaggregating ETFs

With a buy-and-build platform like Beacon, you can quickly build your own ETF disaggregation capabilities that provide you with dynamic and detailed risk information at the press of a button. Using Beacon’s data interfaces, you could subscribe to a third-party ETF database provider and build a mirror of your portfolio that automatically translates your ETF shares into the corresponding holdings. Then you can run your choice of analytics, risk reports, and stress tests against both portfolios and look for significant issues or differences. For example, when investing in cross-country ETFs, you could separate out equity risk from currency issues. Or you could identify elements in the holdings that are particularly volatile, illiquid, or more sensitive to market shocks. Or run what-if analyses to find the fund that best diversifies your portfolio or adjusts your risks the way you want. Having packaged products disaggregated properly allows for stronger risk management, especially for non-linear pay-offs.

Benefits of disaggregation

As the number and variety of ETFs continues to grow, the need for dynamic disaggregation will only increase. ETFs are encompassing more and more markets and instrument types, potentially exposing you to risks that you might not otherwise choose. Especially with alternative funds whose allocations may not fit cleanly into specific buckets. Building dynamic disaggregation into your portfolio and risk management tools enables investment managers to look under the hood and have a much better picture of their actual risk position.

About the author

Richard Jefferson is Head of EMEA for Beacon Platform. He was previously Global Head of Commodities Trading at Deutsche Bank, a business that included the management of commodity and cross-asset index products including ETFs, ETCs, and UCITS Funds listed in Europe, Asia, and the US.