Launching an ETF

Launching an Exchange-Traded Fund: Is it Right for Your Firm?

Since the introduction of the first ETFs in the early 1990s, they have garnered a sizeable portion of the market for pooled investment products. In recent years, nearly as many ETFs have closed as have launched. What do those disparate facts mean for asset managers?

There is no doubt ETFs can have a place in investor’s portfolios and as part of an asset manager’s product lineup. Investors have come to expect that ETFs will have lower expense ratios than comparable mutual funds, and indeed at high asset levels ETFs can be less expensive to operate. Meeting customer expectations for lower cost can cause a margin squeeze for an adviser sponsoring a smaller ETF. Likewise, there are advantages and disadvantages for ETFs compared to mutual funds when it comes to distribution. Some platforms allow trading of any exchange-listed product, which could broaden distribution possibilities, but wholesaling ETFs can be more challenging than mutual funds, and many retirement platforms do not support offering ETFs.

An ETF launch may seem complex, but Ultimus’ extensive list of partnerships throughout the ETF ecosystem will help you strategize and properly manage all of the moving parts involved for a successful fund launch, watch this explainer video about the ETF ecosystem to learn more. There are no shortcuts to learning about the ETF ecosystem. With Ultimus’ deep product knowledge and industry connections, we assist asset managers to help them understand the various parts of the ETF ecosystem, their role in the ecosystem, and the intricacies involved in a comprehensive and operationally efficient fund launch, including proactive introductions to the necessary parties involved and project management of the ETF launch.

Ultimus supports all aspects of launching and operating ETFs and our professionals have the expertise to help you evaluate whether offering an ETF is right for your firm. Contact us today to learn more.

ETFs: The Basics
Who governs an ETF?

ETF portfolios are managed by investment advisers who are technically hired by the fund to manage its assets. Since each adviser and fund are subject to SEC regulation under the Investment Company Act of 1940 (’40 Act), they must design and implement comprehensive compliance policies and procedures. The Financial Industry Regulatory Authority (FINRA) oversees marketing aspects of registered funds, and ETFs also have to comply with listing exchange requirements. In addition, each fund is required to have independent trustees, who are responsible for approving contracts on behalf of shareholders and have continual operational oversight of the fund. While such governance can require effort from all involved, it can also provide comfort for investors who appreciate the protections the structure affords.

Investment strategies that work in a ’40 Act vehicle

The flexibility often surprises advisers. While there are some limitations, many strategies work within the ‘40 Act structure, including traditional equity and fixed income investments, tactical asset allocation, managed futures, distressed debt, global distressed, long/short equity, market neutral, arbitrage, absolute return, real estate, quantitative, and strategic asset funds.

Registration timeframe

It generally takes 4-6 months to register an ETF. Much of this time is dedicated to the SEC review process and the exemptive relief application process.

Minimum assets under management

While there is no minimum size for a registered fund, a certain minimum amount of assets under management is recommended to cover administration costs, unless the manager is willing to cover these until the asset raise is achieved. In addition, the exchanges require a minimum number of accounts to maintain the ETF listing.

Fund board & compliance

All ETFs are required by law to have a board of directors. Ultimus provides a comprehensive suite of specialized services, which includes access to series trust solutions that provide an experienced board of trustees, compliance oversight, and fund legal counsel. Your fund benefits from the economies of scale available through the use of these shared resources. See Choosing the Right Trust Structure below for more information on trust options.

What Will it Cost to Launch & Operate an ETF?

As with any new venture, starting an ETF requires prudent forethought and planning to ensure the best chance of success. You’ll want to consider both the initial upfront investment, as well as the potential ongoing financial commitment. Other considerations are regulatory requirements, resource commitments, and the timeline for launching the fund, just to name a few.

The cost to launch an ETF varies based on whether the fund is created inside a series or standalone trust (see Choosing the Right Fund Structure section below for more information about trust options). Ultimus’ business development team will work with you to determine the appropriate fund structure and explain expenses needed to cover fund administration, annual audit, shareholder reporting and support, transfer agent, corporate governance, and compliance. Separately, you need to consider the due diligence fees for platform access, which are extremely variable, depending on if your primary objective is to gain operational efficiency or if you are looking for additional distribution opportunities.

Through a waiver of the management fee and/or reimbursement, you are responsible for all fund expenses until the assets in the fund hit the breakeven amount. Breakeven is achieved when the adviser no longer subsidizes fund expenses beyond a total waiver of the advisory fee.

Learn more about our ETF distribution services.

Learn about Fees for Active ETFs

Choosing the Right Trust Structure

ETFs must register with the SEC in a shared (series) trust or in a standalone trust format, and Ultimus can help you understand the differences and enter into the best structure for your fund.

A series trust is designed for advisers who want to start their own funds but avoid the complexities associated with organizing a standalone trust. In the series trust model, the organizational structure, including its Board of Trustees, is already in place, reducing costs and saving time. Your fund would become part of a trust with other funds, but each fund is its own separate entity and can maintain its own unique investment strategy and a distinct marketing image. Through this structure, you can focus on managing money and growing assets while the contracted service providers, such as Ultimus, perform the back-office services.

In comparison, a standalone trust is the preferred option if you want to establish a family of funds and/or have greater involvement in the administrative duties of the fund. Advisers have more control with standalone trusts than with series trusts, such as having a key role in the selection of the initial board of trustees, fund officers, fund counsel, custodian, auditor, and administrator. Like a series trust, organization fees are generally paid by you, not the fund.

See below for a detailed comparison of trust structures:

Control/EstablishmentGoverned by an established/existing Board of Trustees and Officers, as well as pre-selected Fund Counsel.Governed by a Board of Trustees and Officers that the client selects.
Creation Timelines4-5 months6-9 months
Creation CostsFees are normally paid by the adviser, not the fund. Likely a lower cost than standalone due to negotiated agreements.Variable based on service provider selection. Fees are normally paid by the adviser, not the fund.
Operational CostsFunds/advisers share trust fees with other entities in the trust, taking advantage of scale and efficiencies of the shared structure.Funds/advisers are solely responsible for the fees associated with the trust.
Adviser PreferenceA cost effective and time efficient way for advisers looking to launch a mutual fund.Typically preferred by advisers looking to start a family of funds or wanting involvement in board selection/participation.
SEC Review75 daysVariable, no set time
15C Process and ApprovalYesYes
Launching an ETF: the Details

It’s important to leverage the experience and expertise of service providers early in the ETF exploration and development process. Your dedicated Ultimus onboarding specialist takes the lead on organizing and launching your fund, guiding you through every step of the process to help you choose the right service providers, product, and trust. At Ultimus, we learn your investment strategy, target market, and business goals before creating your registration statement.

Advisory Fees

The advisory fee is the percentage/basis point fee allocated to the fund and paid to the investment adviser for serving in that role. You recommend the amount and the board approves it on a contracted annual basis. Generally, the fee should be within the range of fees of peer or substantially similar funds – a review and process Ultimus will guide you through. The fee is assessed based on the net assets of the fund and subject to waiver based on the fund’s expense cap.

Prior Fund Performance

You may be able to utilize prior performance in your fund marketing if a substantial degree of consistency in asset management team, investment strategy, and investment securities exist. The use of prior strategy performance will be limited to the prospectus unless a private fund is reorganized to launch the mutual fund. Both Ultimus and the trust counsel will help assess consistency, as well as provide additional requirements.

SEC Registration

Ultimus is skilled at preparing registration statements that are broad enough to be flexible down the road, but also narrow enough to inform potential investors about how the strategy works. We can also help you evaluate how important new structures and strategies are to your business needs and how to present them in your statement. Once your registration statement is complete, we will file it with the SEC. Towards the end of the second month after filing, the SEC will normally contact us with questions and comments. After all questions are resolved, the SEC will inform us that the fund is effective.

Additionally, the Ultimus operational team helps get a new ETF listed on an exchange as part of the launch. With the SEC’s rule modernizing the regulation of ETF in 2019, the barriers to entry for launching an ETF have been significantly reduced. Subsequently, an advisor is no longer required to obtain special exemptive relief from the SEC to permit them to advise either a passively managed or actively managed ETF. The ETF Rule also offers advantages for actively managed ETFs as compared to years past, such as the ability to use “custom baskets” to trade the ETF’s portfolio on a tax-advantaged basis.

Marketing Services & Distribution

No matter how strong your strategy is, distribution is truly key to the success of your fund, and one for which you must plan and budget for adequately. Sales and marketing for a mutual fund or ETF are likely different than how you promote your firm today, so it is important to develop a complete long-term business plan for fund launch and operation. You will need to have a firm understanding of your potential target audience, taking into account varying market conditions, investment trends, and shortages in market offerings. Understanding your target client and how they approach investing is a crucial step in developing your fund; this is an area you can’t overlook. In response to this need, we offer professional marketing support for your new fund, employing a 4-step approach which includes creating a core messaging strategy, establishing or redesigning your brand, complete fund and firm website creation, and creating marketing collateral such as fact sheets and pitch decks including the content, design, and compliance review. For ETF websites, we offer a technology solution that displays live fund data—it is a solution that is flexible, simple and customizable. For continuity, we also offer ongoing digital marketing and website maintenance services.

The distribution area is also multifaceted, so Ultimus is your accessible resource and partner in helping you keep up with the regulatory complexity and changes in this arena. Our team of specialists helps you navigate the distribution environment through a high-touch, solutions-driven consultative approach. To maximize your sales potential, we provide insight and guidance on your target market to assist in the development of a sales and marketing strategy that fits your current growth cycle.

Learn more about Ultimus’ distribution services.

Contact us today for a consultation about whether starting an ETF is right for you.

Q&A: Growth in ETFs

Click to read our Q&A with Mike Prendergast, SVP, Senior ETF Product Specialist

Fees for Active ETFs

Fees for Active ETFs

Ultimus offers full service support during fund launches

Ultimus offers full service support during fund launches

Ultimus provides turnkey solutions to launch a fund

Ultimus provides turnkey solutions to launch a fund

ETF Facts

  • Registered as investment companies under the Investment Company Act of 1940 (‘40 Act)
  • Primarily regulated by the SEC and the Financial Industry Regulatory Authority (FINRA)
  • Extensive disclosure, reporting, and requirements pursuant to the ‘40 Act
  • May be advertised and offered to retail investors
  • Interests must be registered with the SEC pursuant to the Securities Act of 1933, and the fund is subject to the reporting requirements of the Securities Exchange Act of 1934
  • Must have a board of directors, 40% of which must be independent
  • Generally, the person or entity who manages the portfolio must be a registered investment adviser under the Investment Advisers Act of 1940
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The Ultimus Group, LLC is an Equal Opportunity Employer. All rights reserved.

DISCLOSURE: Information contained on this website is based on public data, historical agreements and dialogue with intermediaries. Such information represents our current understanding of the described platforms and the costs associated with them. In many cases, such costs may be negotiable. All pricing and fee information is subject to change without notice.

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