For my blog post this time around I thought it might be useful to provide a quick refresher on some of the key players involved in the ETF “ecosystem”. By now, you’re probably all well aware that ETFs are bought and sold like shares on stock exchanges (in our case the ASX), via either an online trading platform or broker. You’re probably also aware of the role of the ETF Fund manager (for example ourselves, BetaShares). Below is a brief synopsis of the other key players, some of whom you might have heard of and not been quite sure what their role is.
- Market Makers: Market makers provide liquidity in an ETF. By way of comparison, a listed company is “close-ended” (meaning there is a set number of shares outstanding). Thus the presence of more buyers than sellers in the market will tend to drive the price of a stock up, and more sellers than buyers will tend to drive the price of a stock down. On the other hand, an ETF is an “open ended” vehicle, units are held in inventory by a market maker who is able to sell units to investors when there are buyers, and buy units from sellers. Importantly, if they need to, market makers may create more or sell down units to the fund manager to meet market demand. For more information on this process see our previous blog.
- Custodian: The role of the custodian is to hold the ETF assets for the ETF for the benefit of the unitholders. This is similar to holding your personal assets in a safe custody box at your local bank, although of course the value of the ETF’s assets will rise and fall depending on market conditions. This structure mitigates the risk of investors being exposed to the fund manager’s own financial risk, by separating the fund manager (and its own assets and liabilities) from the assets of the actual fund. For more information on this see.
- Fund Administrator: Essentially, a Fund Manager may choose to outsource some of the administration requirements to a Fund Administrator, who serves as a third party that assists in operating some parts of the fund. Some of the Administrator’s key responsibilities include independently calculating the Net Asset Value (NAV) of the fund, preparation of financial reports, and performing distribution calculations. BetaShares currently uses RBC Investor Services and FundBPO as our fund administrators.
- Registry: You will likely be familiar with the concept of a registry if you currently own any shares. The registry is responsible for maintaining individual investor records. The registry holds a record of the number of units in the ETF the investor has, will apply distributions to investor accounts, send out statements and assist investors with queries on their investment holding. BetaShares currently uses Link Market Services as our Registry.