By Bloomberg News
It’s never been easier to start an exchange-traded fund — 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 they previously relied upon to usher them through the arcane process. And they aren’t 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 labeled some ETF issuers — are the lifeblood of so-called white-label fund firms, which make their money guiding industry newbies into the $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. Now, with a rule on the way to streamline the way 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.”
The Enablers
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 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 $1 million or more in legal fees.
No longer. Recent issuers estimate that gaining relief now costs as little as $15,000 in administrative and legal fees. And EquBot, a San Francisco-based firm, heard back from the SEC about its request to start an ETF in just five weeks. The company now plans to sell an ETF built using artificial intelligence.
“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 at Toroso Investments, an ETF consultant, asset allocator and index provider.
Moving On
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’s 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 Securities and Exchange Commission 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 $3.3 billion of assets, isn’t 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 — like a custodian, lead market maker and the authorized participants that create and redeem ETF shares — lined up, Mr. Stevens said.
Redefining Value
It’s this command of the wider ETF ecosystem, not regulatory approval, that white labels will rely on going forward.
Exponential’s Mr. Bak, for example, emphasizes 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 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 U.S. Bancorp’s investment trust for its new fund alongside its own exemptive relief.
White labels also offer a door to financial advisers that smaller shops can’t open, according to Vince Birley, chief executive officer at Vident Financial, which started several funds with ETC. That’s one reason he won’t be going it alone anytime soon.
“They definitely have to redefine what they’re bringing to the table,” he said. “But after I look at what they do for us, I really don’t want to take that on. For us, at our size, it still makes a lot of sense.”
Source: https://www.investmentnews.com
Important Disclosures
Exchange Traded Concepts is an SEC Registered Investment Adviser. The Firm's Form ADV is publicly available and can be found here: https://www.adviserinfo.sec.gov/Firm/151197. ETC may be subject to various conflicts of interest in the provision of its services. Potential conflicts of interest shall be identified in the Firm's Form ADV. The Exchange Traded Funds are referred to as "Funds" for purposes of this document. ETC transacts business in the United States and other jurisdictions where it is properly registered or excluded or exempted from registration requirements. This document does not constitute an offer of services in jurisdictions where ETC does not have the necessary licenses.
No representation is made that any Fund's investment process, objectives, goals or risk management techniques will or are likely to be achieved or be successful or that any Fund or any underlying investment will make any profit or will not sustain losses. The risks of investing in a Fund will not be negated by ETC's Fund services, and no assurance is given that a Fund will not be exposed to risks of significant trading losses.
The information provided herein does not constitute tax, legal or accounting advice. ETC does not provide legal, financial, accounting or tax advice. Clients and prospective Clients, as well as investors and prospective investors in a Fund ("Investors") are advised to seek the counsel of their own legal, financial and tax advisors for all matters relating to the services and structures contemplated herein. Each Investor (either alone or with its professional advisors) is solely responsible for its own due diligence, risk assessment and tolerance, investment objectives, any decision to invest in a Fund, and for monitoring its investment for purposes of determining whether it wishes to remain invested in such product and whether such product continues to be appropriate for its circumstances and requirements.
The information provided herein: (a) is provided as of the date indicated, (b) is in summary only and is not complete, and (c) is subject to change at any time without notice. Certain information provided by ETC is based on third-party sources and, although generally believed to be reliable, has not been independently verified. ETC is not responsible for errors or omissions from these sources. No representation is made with respect to the accuracy, completeness, or timeliness of such information, and ETC assumes no obligation to update or otherwise revise such information. In no event will ETC be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with the use of the information contained herein, even if advised of the possibility of such damages. ETC and its respective employees and its affiliates hereby exclude, to the extent permitted by applicable law, all liability in connection with the use of the information herein.
Interests in Funds will not be insured by the FDIC, the SIPC or any other organization, will not be deposits of any bank, and are not guaranteed by any bank.