Although the market is currently flooded with ETFs, the decision to actually launch an ETF and all it takes to bring to market is a complex process that requires careful thought in order to have a shot at success, according to Exchange Traded Concept's Garrett Stevens.

Industry veteran Lara Crigger grabbed some time with Garrett Stevens, Co-Founder and Chief Business Officer of Exchange Traded Concepts while at the ETF Oasis at Future Proof. Their conversation covered what it takes to launch an ETF in this year's market, the benefits of ETFs, 351 exchanges and more. The following is a transcript of their conversation.

Bringing ETFs to Market

Lara Crigger: Thank you for joining me. I’m Lara Crigger, here at Future Proof. I’m here with Garrett Stevens. He is the Co-Founder and Chief Business Officer for Exchange Traded Concepts. Thank you for joining me.

Garrett Stevens: Thank you. It’s great to be here.

Lara Crigger: So my first question for you: with ETFs at almost $16 trillion in assets under management right now, and new launches hitting record levels, what separates a launch that works from one that’s going to close in two years?

Garrett Stevens: You know, there’s a bunch of big things and a bunch of little things. It’s not just one thing, unfortunately. If we all knew the secret sauce, it would be a little different. But I think you’ve got to have a thoughtful plan for distribution. How are we going to get this thing out? How are you going to stand out? There are more ETFs than there are stocks on the stock market these days, so you’ve got to have a plan.

And it’s not just about the launch itself. Everyone gets all excited about the launch, here’s where we’re going to launch, launch day. We have to remind people that the launch is the starting line, not the finish line for all this work. So you’ve got to have a deep plan for how you’re going to get the word out, how you’re going to educate people about your product. More than that, it goes all the way back to the design of the product. What is this thing that we’re building? How is it differentiated? Who’s going to use it?

A lot of people come to us and say, “Everybody needs this fund.” It’s hard to come up with the product that everybody needs; there’s going to be a niche. Is this more retail‑focused? Is it institutional‑focused? Is it meant for a specific demographic? So there’s a lot of work that goes into it ahead of time, to do everything you can to give it the best chance of success.

Lara Crigger: Okay, so if an advisor here is weighing whether to launch an ETF or to stay in the SMA that they already have, how should they think through that decision?

Garrett Stevens: Part of that comes down to the benefits of the ETF wrapper. Everybody knows about the tax efficiency, the liquidity, being able to get in and out of it during the day; all of those are big benefits. It also depends on what you’re doing in your SMA. Will it fit in an ETF? There are a lot of regulatory items, diversification requirements, liquidity requirements. Derivatives is another big thing that people are trying to get more and more into ETFs, but it just doesn’t always work. So we’ve got to make sure can we do it, number one? And then number two, is it something that people really need in that wrapper?

Maybe it’s okay in an SMA, maybe it’s not something that everyone automatically needs access to, but for the right fit, it is a great wrapper for it. So it’s about that discovery process of, is it a fairly active strategy that’s maybe creating a lot of capital gains? Then it’d be much better to have an ETF version of it alongside your SMA; your taxable money into your ETF for your ETF clients, your non‑taxable stays in the SMA, so they get the ability to customize a little more. There are different reasons someone might want to do it, but it’s important to compare them and make sure people understand the difference between the two.

Lara Crigger: I’m hearing a lot about 351 conversions. 351 conversions allow an advisor to move an SMA book into an ETF without creating that immediate tax event. Walk us through how that process works, briefly.

Garrett Stevens: Sure. The big benefit of the 351 is to take those positions that have high capital gains built into them already, deliver them into the ETF, and then be able to run them in a tax‑deferred manner going forward. It’s not the end‑all be-all; you can’t just move in and wash everything out and not pay taxes. It’s really a deferral mechanism. And there are only certain types of securities that can be done via 351. So international stocks, for instance, are really not very easy to do, there are DTC issues on moving them in and out; cash‑market foreign securities can’t be done at all.

Lara Crigger: Mutual funds?

Garrett Stevens: Mutual funds, right. So there’s a select list of things that can’t be done. But it is a great way for people to run a strategy that they’ve been running currently, put it in a more tax‑friendly format, move it over, and keep doing what they’ve been doing. That’s certainly allowable, and lots of that’s happening. We do lots of those conversions. They’re great for family offices, they’re great for SMA managers.

Maybe you’re an advisor who’s been running model portfolios for your clients, and those models have built up capital gains in them. It’s getting harder and harder to diversify those, now that you’ve had this Nvidia for however many years at this point, that’s done really well. So you’re getting away from your model just because you don’t want to cause a tax issue for your clients. We can take those models, roll them into a new ETF via 351, and you have the ability to continue what you’ve been doing previously without the same tax consequences. So it’s a great tool for the situations where it really fits.

Lara Crigger: Makes sense. All right, last question for you: what is the most unexpected strategy you have seen in an ETF wrapper recently?

Garrett Stevens: Oh boy. We’ve been doing this for 15 years, launching ETFs for people.

Lara Crigger: And I’m sure you’ve seen a lot of crazy things.

Garrett Stevens: A lot of ideas come to us. Rather than single anybody out here with some of the crazier ideas, what I would say is that what we’re seeing more is the continued sophistication and complexity of the ETFs that are coming out. So many derivatives, options, swaps, these autocallables, all of these things that you never really thought of previously going in an ETF are going in now.

There’s a debate whether it all needs to go in there or not, and who those products are right for. But the continued innovation in the ETF industry as a whole is astounding. To be able to bring these more complex products to market takes a lot of work. It’s a lot of legal work, a lot of working with the SEC and staff to say, “Hey, can we do this, what do you think?” So there’s a lot that goes into it, but that complexity is growing, not shrinking, in this business. So I think we’re going to see more of it.

Lara Crigger: All right, we’re going to have to leave it there. Thank you so much for joining us.

Garrett Stevens: Thank you. Appreciate it.

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