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Asset managers plan new ETFs on their own
IT has never been easier to start an exchange-traded fund (ETF) - or so it seems.
Just ask the two wannabe asset managers who are planning new funds by themselves, away from the third-party ETF expert that they previously relied upon to usher them through the arcane process. And they are not alone. With regulators set to remove red tape around getting funds to market, flying solo is now a viable possibility for even the smallest of issuers.
These "financial buccaneers" - as Vanguard's legendary founder, Jack Bogle, recently labelled some ETF issuers - are the lifeblood of so-called white-label fund firms, which make their money guiding industry newbies into the US$3.6 trillion exchange-traded marketplace.
White labels gained traction after the financial crisis as a means for start-ups to take on the mega money managers that dominate ETFs. But the legal battles surrounding one of these providers, ETF Managers Group, have cast a pall over the business in recent years. And now, with a rule on the way to streamline the way that funds are approved - a process known as "exemptive relief" - expert issuers are changing up their business models.
"It's really no longer about simply the speed of exemptive relief or saving some legal fees," said Phil Bak, chief executive officer of Exponential ETFs, which sells its own funds and selectively acts as a white label. "What's more impactful to potential firms is having that expertise in house, on their team, on day one."
Many of the first white labels were born when their own funds shuttered. These companies, which had already secured regulatory approval to sell ETFs, discovered that newcomers would happily pay a fee to use their exemptive relief. It gave them a new lease of life, and aspiring asset managers were able to bypass a wait of a year for their own approval while saving US$1 million or more in legal fees.
No longer. Recent issuers estimated that gaining relief now costs as little as US$15,000 in administrative and legal fees. And EquBot, a San Francisco-based firm, heard back from the Securities and Exchange Commission (SEC) about its request to start an ETF in just five weeks. The company now plans to sell an ETF built using artificial intelligence (AI).
"I don't really think that the old school white-label market of 'I can do it cheaper' can survive," said Mike Venuto, chief investment officer of Toroso Investments, an ETF consultant, asset allocator and index provider.
EquBot had previously worked with ETF Managers Group, better known as ETFMG, to list an AI-based ETF. Andrew Chanin, who helped set up HACK - the cyber security ETF at the heart of legal action against ETFMG - meanwhile intends to issue ETFs from a new company called ProcureAM that he has formed with industry veteran Bob Tull.
New regulations that are expected to be released for comment by October will likely make fund issuance even easier. The so-called ETF rule is set to scrap the need for new sellers of plain-vanilla ETFs to approach the SEC for exemptive relief from the Investment Company Act of 1940. This will further cut both the time and money needed to start an ETF.
But Garrett Stevens, chief executive of Exchange Traded Concepts, a white label with US$3.3 billion of assets, is not overly concerned. "Exemptive relief aside, it will take you a year to set up the infrastructure to launch an ETF on your own," he said. "We've made it look easier than it is."
That infrastructure includes establishing an investment trust to house the fund, setting up a board of directors and getting essential service providers - such as a custodian, lead market maker and the authorised participants that create and redeem ETF shares - lined up, ETC's Mr Stevens said.
It is this command of the wider ETF ecosystem, not regulatory approval, that white labels will rely on. Exponential's Mr Bak, for example, emphasises his firm's experience in compliance, operations and portfolio management.
Marketing and public relations capabilities can also make a white label stand out, Mr Venuto said. ETC even offers clients help in designing their websites.
White labels still seem to offer some value to those who previously used ETFMG. In addition to proprietary funds, Mr Chanin's new venture encompasses a white label for sponsors that want to directly pay service providers, according to Mr Tull. And EquBot will use US Bancorp's investment trust for its new fund alongside its own exemptive relief. BLOOMBERG