Launching 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.

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.

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.

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.

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.

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.

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.

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, ETFs are primarily governed by the ’40 Act, which is essentially a rule designed for mutual funds. To launch an ETF, an issuer must get “exemptive relief” from the SEC to exempt the fund from the aspects of the ’40 Act that apply to a mutual fund, not an ETF. Ultimus can help guide you through this application process.

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. 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.