Data: The Catalyst Behind the Active ETF Market's Explosive Growth

The ETF market has seen significant growth over the past two decades, evolving from a niche investment vehicle into an important component of modern portfolio management, with global assets under management (AUM) approaching $17trn. While this expansion is driven by demand for cost-effective and liquid investment options, the robust data infrastructure supporting the ETF ecosystem has been particularly impactful for active ETFs, which have emerged a rapidly growing segment within the broader ETF landscape.

The Data-driven Active ETF Revolution

The growth of the ETF sector is reflected in the numbers. As noted by Anthony Rayar, director and product owner of ETF composition data at S&P Global Market Intelligence, “the global ETF market has experienced a compound annual growth rate of around 20% in the past few years, with US ETF assets exceeding $12trn”. Active ETFs have been a significant contributor to this growth, leveraging increasingly sophisticated data ecosystems that provide the transparency, efficiency, and accessibility needed for active management strategies to thrive in an ETF wrapper.

Aisling O'Boyle, executive director and head of ETF product at S&P Global Market Intelligence highlights that "the ETF market has democratised access to diversified investment strategies previously available only to institutional investors at a fraction of the cost." This democratization has been particularly impactful in the active space, where data infrastructure enables investors to access actively managed strategies with the same transparency and liquidity benefits of traditional ETFs.

ETF Composition Data: Enabling Active Management Transparency

Transparency is at the heart of ETFs' appeal, which starts with detailed composition data. Unlike mutual funds, which disclose their holdings quarterly, ETFs typically offer daily updates on their underlying components, weightings, and characteristics. For active ETFs, this enhanced transparency has been revolutionary, allowing portfolio managers to implement active strategies while maintaining the disclosure requirements that investors expect.

The granularity of ETF data has significantly improved, with providers now offering insights into ESG metrics, carbon footprints, and factor exposures. These advancements have been particularly valuable for active ETF managers, who can now communicate their investment process and portfolio positioning with greater clarity, helping investors understand how active decisions are driving performance.

Active ETFs that provide comprehensive and easily accessible composition data may attract higher inflows and benefit from greater liquidity than those with less transparent reporting, highlighting the importance of data transparency in building investor confidence in active management approaches within the ETF structure.

Index Management Services: Supporting Active ETF Innovation

While traditional ETFs primarily tracked broad market indices, active ETFs often use indices as benchmarks rather than as portfolios to replicate. The development of sophisticated index services has provided active ETF managers with more specific benchmarks against which to measure their performance and communicate their value proposition.

Modern index providers use extensive datasets to construct and maintain indices that serve as meaningful comparisons for active strategies. The emergence of factor indices, thematic benchmarks, and ESG-focused indices has created reference points that help investors understand how active managers are positioning their portfolios relative to specific market segments or investment approaches.

Portfolio Composition Files: Facilitating Active ETF Creation/Redemption

The efficiency of the ETF ecosystem depends on the creation/redemption process, which relies heavily on portfolio composition files (PCFs). For active ETFs, these files are particularly critical as they must balance transparency requirements with the need to protect proprietary investment strategies.

PCFs represent a significant data innovation that has improved the efficiency of the active ETF market. These files specify the exact quantities of each security required for a creation unit, along with cash components, estimated fees, and other essential information. The reliability and timeliness of PCFs are crucial as they directly impact ETF liquidity and tracking precision, allowing active managers to maintain their desired exposures while accommodating fund flows.

iNAV Services: Supporting Active ETF Valuation

Intraday net asset value (iNAV) services provide real-time estimates of an ETF's underlying value throughout the trading day. This innovation has been vital in building investor confidence in active ETFs, which may experience more significant deviations from their benchmarks due to active management decisions.

The quality of iNAV calculations has improved significantly due to advancements in data processing, with today's sophisticated iNAV services utilizing real-time pricing feeds, fair value adjustments for international securities, and advanced statistical techniques for more precise valuations. These improvements have been particularly beneficial for active ETFs that may hold less liquid securities or employ complex strategies.

The Future: Data as the Lifeblood of Active ETF Innovation

As active ETFs continue to grow, data will remain their essential foundation. Emerging trends highlight the ongoing significance of data innovation:

• Alternative data integration: Active ETF managers are increasingly using alternative data sources, such as satellite imagery and social media sentiment analysis, to enhance their investment decision-making processes.
• Predictive analytics: Advanced machine learning techniques are being used on large datasets to identify patterns and support risk management analysis, giving active managers new tools to inform their strategies.
• Customization at scale: Data-driven platforms are facilitating mass customization of ETF-like products, allowing investors to access actively managed strategies tailored to their specific needs.
• Enhanced sustainability metrics: With the rise of ESG investing, sophisticated data services are emerging to measure and report on the environmental and social impacts of active ETF portfolios.

We expect that the next wave of active ETF growth will be driven by data innovations that enable greater personalization, improved risk management, and seamless integration with broader wealth management platforms, positioning active ETFs to continue their rapid expansion within the broader ETF.