Understanding PCF calculation

PCF Data collection

PCF data could come from investor service groups such as custodians, administrators, depositaries (which may be combined in one entity); brokers; exchanges; other trading venues, and index providers. It could include share prices, bond prices, currency exchange rates, futures and other derivative prices. Indices and PCFs also need to make adjustments for dividends and other corporate actions, such as rights issues, takeovers, index additions and deletions. The exercise can be more complicated for fixed income indices, which can contain a larger number of constituents.

PCF Quantity and Value

A PCF needs to specify quantities or weights and values for all instruments so that the PCF can be used to create a basket behind an ETF.

The process can also be different for physical and synthetic ETFs. For a physical ETF doing in specie dealing, the ETF shares are exchanged for the physical securities. For a synthetic ETF, they are matched against a swap, which is usually based on an index. (The situation can become more complicated where managers choose to “optimise” their tracking of the index rather than fully replicating it, but even in this situation they still need a timely and accurate PCF file to gauge how far they can afford to deviate from the index).