Launching an ETF has become significantly easier in recent years, through the ETF Rule 6c-113, which streamlined the ETF launch process and the use of turnkey series trust platforms that assist advisers with fund formation and ongoing operations. There are some distinct advantages regarding ETFs as compared to a separate account structure. Outlined below are some of the key advantages of an ETF for both advisers and investors when considering launching a fund.
- Administrative Efficiency – Converting SMA assets into an ETF creates efficiencies and execution advantages that aren’t available in separate accounts. In an ETF structure, advisers can buy and settle securities in bulk as opposed to buying and allocating individually, eliminating duplicative trades and tedious individual reporting requirements that are the norm in SMAs. But it’s not just a time savings play; there are cost savings that come from limiting trading in individual securities for individual accounts as well. Advisers can often more effectively execute their strategies in an ETF as well because they have access to a broader range and conceivably better performing securities.
- Access to New Investments – By pooling assets in an ETF, investors can gain access to asset classes and investment opportunities they simply can’t access to in an SMA. This often results in an adviser’s ability to achieve greater diversification. Beyond access to new investments, an ETF comes with the expertise, professional management and analysis of the full investment team and robust set of service providers that can create a distinct advantage for investors.
- Access to New Investors – For managers, an ETF creates the opportunity to gain access to a new audience of investors and a new stream of assets. While some advisers may launch a fund only for the benefit of current SMA clients, there is an opportunity to provide access to the firm’s clients who couldn’t meet the minimums of the SMA strategy or to target a broader base of external investors in an ETF structure. ETFs open doors to new sales channels since it is traded on an exchange and broadly available for purchase at launch.
Considerations for Conversion
While there are many advisers who would benefit from converting their SMAs to ETFs, there are many for whom the SMA structure remains the best option. So, when is an ETF a better option for advisers? Below are some important considerations and potential triggers for managers considering whether launching an ETF is the right strategy for their separately managed accounts.
Has Account-level Administration Become Too Cumbersome? If the answer is yes, then this strategy is one of your primary alternatives. Advisers who manage too many SMAs find themselves spread way too thin, making it difficult to focus on the firm’s investment strategy through all of the operational clutter.
Do You Have Compliance Concerns? Global Investment Performance Standards (GIPS) compliance is difficult to manage. The differing execution of each SMA in an adviser’s arsenal piles on more compliance considerations and reporting intricacies. While concerns alone won’t push an adviser toward launching an ETF for SMA investors, it’s important to address this constantly during growth to see if a change becomes necessary.
Are You Looking for Additional Investors? Advisers that decide to launch an ETF have the opportunity to open it up to an entirely new and different investor base. Prospective investors that were turned away because of SMA minimums now have the opportunity to leverage the firm’s investment strategy.
Can Your Firm Support the Cost of Managing an ETF? Launching an ETF comes with inherent costs, those costs are predominantly expenses covered by the fund, in so far as the fund has sufficient assets to cover those costs. If not, the additional costs are reimbursed to the fund by the adviser.
While managing a registered fund is not right for every firm, finding the answers to these questions will start advisers down the path toward the type of growth that fits best. Registered funds can help address the long-term strategy, while still keeping present investors in mind and preserving the advantages of a separately managed strategy. If you are interested in more information about converting SMAs into an ETF, or launching an ETF to supplement your current product line up, please Contact Us.