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.
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
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.
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/Establishment||Governed 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 Timelines||4-5 months||6-9 months|
|Creation Costs||Fees 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 Costs||Funds/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 Preference||A 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 Review||75 days||Variable, no set time|
|15C Process and Approval||Yes||Yes|
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.