SEC Makes It Easier to Launch ETFs

>SEC Makes It Easier to Launch ETFs

SEC Makes It Easier to Launch ETFs

By | 2019-10-14T09:10:31-04:00 October 15, 2019|Registered Funds, Regulatory|

NEW RULING ANNOUNCED FROM THE SEC: The Securities and Exchange Commission (SEC) voted unanimously on September 26 to modernize the regulatory framework for Exchange-Traded Funds (ETFs).  The new ETF Rule will level the playing field for ETF providers so that, with few exceptions, they are operating under the same rules (i.e., instead of unique exemptive orders that are costly and time-consuming). While saving money is an important factor to advisers, and the new Rule does help reduce costs and time to market, Custom Baskets are one of the most significant changes of the Rule – allowing for more flexibility and the potential to help improve tax efficiency.

WHAT IS AN ETF: ETFs are a diversified collection of assets like mutual funds used by investors for a variety of purposes, including core components of long-term investment portfolios, investment of temporary cash holdings, and hedging investment portfolios.

WHAT ARE CUSTOM BASKETS? When ETFs create or redeem shares through authorized participants, they exchange a ‘basket’ of underlying securities comprising a portion of the ETF portfolio in exchange for shares in the ETF that can be traded in the secondary market. Typically, that basket is a pro rata slice of the whole portfolio the ETF owns. A custom basket allows fund sponsors and trading partners more flexibility to rebalance or adjust portfolios behind the scenes, using non-pro rata portions of the portfolio.

PRIOR TO THE RULING: Before the ruling, registration could take months to process, with filing costs of $25,000 or more.

POST RULING: The new modernized rule will help reduce overhead costs, shorten launch times, and provide simplicity to the process. While the timing for launching these funds prior to the ruling was typically at least 90 days and likely more, using a series trust that has an existing registration statement allows new ETFs to be effective in 75 days.

VALUE TO INVESTORS: ETFs provide ongoing liquidity to investors by allowing trading on an exchange during market hours, unlike mutual funds that typically permit trades once per day. ETFs disclose full holdings daily, whereas mutual funds only disclose their holdings 30 days after each quarter close. That means investors can more closely monitor whether the fund manager is adhering to the fund’s strategy. ETFs typically are also a lower-cost investment than a mutual fund or separately managed account because ETF shares are traded between investors on the secondary market, not with the fund company itself. ETFs also can be more tax efficient because their structure triggers fewer taxable distributions. Disclosures for ETFs are easier for consumers to research (e.g., bid-ask spreads and premiums/ discounts) via an accessible website versus searching for a prospectus on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

WHY AN ETF MAY BE RIGHT FOR YOU: Investors are always seeking lower-cost, transparent, liquid, and tax efficient investment vehicles. Investment managers looking to reach new audiences should consider expanding their potential investor base with these types of fund products – especially now that the time to market and cost has become more appealing with this new Rule. Also, moving separately managed account assets to your own ETF may result in quantifiable efficiencies as you can manage one account at the firm instead of many.

QUICK STATS ON ETFs: Today, there are more than 2,0001 ETFs with over $4 trillion2 in total net assets in the US. Global assets are projected to double in the next five years, and ETF trading currently accounts for about a quarter of the daily volume in US stock markets. Investor demand for ETFs continues to grow, and the recent SEC modifications will increase both growth and competition because the funds are a fan favorite for financial advisers.

GETTING STARTED: The keys to successful ETF funds are having a firm plan in place for distribution, choosing the right partners (lead market maker, fund administrator, listing exchange), and researching the nuances of ETFs including creation size, fees, expense ratios, and overall price.

WORKING WITH AN EXPERIENCED TEAM: While all the new rule changes are positive, there are still a multitude of nuances navigating the ETF ecosystem. Ultimus Fund Solutions has the experience and depth via compliance professionals to help with interpretation and real-life application to make sure that new ETF products brought to market meet all the new requirements, and to help investment managers take advantage of all the new benefits.


  2. Source: 2000 – 2018 data from BlackRock Global ETP Landscape; 2024 estimates from BMO Global Asset Management ETF Outlook 2019

2096-NLD-10/9/2019   8133 UFS 10/9/2019

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