Expediting ETF Share Class Switches
ETF share classes are quicker and cheaper to launch than starting a brand new fund. A single ETF fund can have dozens of share classes, Four variables are: listed versus unlisted share classes, the currency of the share class, whether it hedges holdings in different currencies back to the share class currency, and whether it accumulates or distributes income. With just two currencies, say GBP and USD, there are already sixteen possibilities shown below:
Investors may need to switch between ETF share classes for different reasons. Their currency hedging or trading views and policies may change. There could be tax issues, where accumulating and distributing share classes might be taxed at different times and/or at different rates of tax, for instance where income and capital gains taxes differ.
The flexibility afforded by the variety of ETF share classes only works if the operational routines behind the scenes run smoothly. Operationally, ETF switches can create challenges of coordination and accuracy, and a well-structured process helps to organize switches - and avoid errors if share classes of different funds with similar names cannot actually be switched!
The award-winning COSMOS ETF creation and redemption platform makes the whole switching process easier. Drop down menus let you click the fund being redeemed and created, restricting the selection to those with a common LEI (Legal Entity Identifier).
The primary “Switch type” choice is a currency switch, or a non-currency switch, but there are plenty of other details to populate. Tabs pop up with other drop down menus for primary ticker, fund name, ISIN, asset type, currency, AP, order type and date as well as switch type.
Thinking ahead to settling the trade, there are fields for settlement type and date, settlement period, pricing period, number and size of basket.
Naturally the settlement data considers holidays and other non-trading days and takes account of T Plus One settlement in the US, Canada and Mexico if relevant. The system then automatically calculates the earliest feasible settlement date.
Readers should watch this space for enhanced functionality on calculations, thresholds, and settlement amounts, coming later this year.
