Don't be fooled by the hype.
On the heels of the SEC's recently proposed "ETF Rule," you may have seen headlines declaring that it will soon be easier and cheaper than ever to launch your own exchange-traded fund (ETF). While there are some major regulatory changes on the horizon in this space, these headlines are misleading.
The process to acquire exemptive relief may ease up a bit, but the registration process is only one piece to the complex puzzle of launching and overseeing an ETF. Many other pieces involved in building the operational framework -- managing compliance costs, maintaining industry relationships, hosting regular board meetings, etc. -- will still be just as difficult. That is where white-label ETF issuers come in.
Here are four ways using a white-label issuer will continue to improve your ETF experience.
You can build and launch an ETF completely on your own, but you will need to spend a significant amount of time and money on a new business. There are numerous moving parts that need to work in tandem to create a final product, and some of these will inevitably have to be outsourced. To develop these outsourced relationships will require a significant expenditure of time researching potential partners, attempting to develop a relationship with those vendors and getting established on their platforms.
An ETF needs authorized participants (APs), a custodian, market makers, legal counsel, independent auditors, insurance coverage and a number of other service providers. In many cases, these third-parties will not even consider working with new entrants to the space, given their workload with existing partnerships and the significant time and expense involved with onboarding new relationships. The most significant value of a white label may be access to all of their pre-established relationships.
As with most businesses, volume results in more competitive pricing. When a service provider knows there are multiple accounts with the same relationship, pricing can be more competitive. White-label issuers bring several funds at a time to these vendors, and the economies of scale and lower costs are passed on to each new ETF in a white-label issuer's series trust.
Key examples of this include the legal governance of each trust, which includes quarterly meetings and compliance programs whether there is one fund or twenty funds; insurance coverage; trustee fees and meeting expenses; distribution agreements; compliance; and audit and legal relationships and fees.
The total savings for participating in a series trust versus a standalone trust for one or two funds is, in our experience, $20,000 to 30,000 per year.
The mechanics and logistics of a new filing, even without the exemptive order process, adds 30 to 45 days to a new ETF registration. The two biggest factors are the time and expense required to organize a new investment trust and hold the organizational board meeting, and the additional time the SEC typically takes in reviewing such a de novo filing versus a filing that is a new series in an existing trust.
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The sooner you can get a new ETF to market, the sooner you can take advantage of market demand and start raising assets and collecting investment advisory fees. Time is money, and white labels can save you a lot of both.
You wouldn't get in a plane with someone who had only read about the mechanics of flying, and you'd probably prefer to have surgery conducted by a doctor who had performed the procedure before. In any industry, no amount of book knowledge can make up for hands-on experience.
Experience is the best teacher. White-label firms know the roadblocks and common mistakes made while launching an ETF, having experienced or observed them at one point or another. No matter how much you have read on a subject or how many experts you have consulted, the actual process is usually different.
Partnering with a white-label issuer isn't just about fast-tracking a product, it's about getting access to the entire ETF ecosystem. The best white-label issuers have a long history in fund consulting and administration, and can partner with you from inception, to launch and through many years of operations. White labels can be your guide for getting started in the ETF business, and navigating the regulatory and operational minefields, especially as we continue to see more changes in this space.
By: Kip Meadows, CEO of Nottingham.