Launching An ETF Is No Cheap Endeavor

October 17, 2016

Considering how much ETFs are heralded for their low fees, and how many ETFs get launched every year, it’s almost surprising how expensive it is to bring a new ETF to market.

There are myriad steps that go into launching an ETF, and there are just as many costs and fees associated with the process. To get a sense of how much you’d have to spend if you were to put your great investment idea into an ETF wrapper, we talked to a few industry sources who have brought many funds to market over the years, and who are still innovating in the space.

Here are some of the estimated costs of launching and managing an ETF they shared with us, based on their experience and industry knowledge:

Registration Cost: $100,000 to $500,000

The range in the registration process cost has to do with the complexity of the product you are bringing to market.

The SEC has what’s called “generic” relief for certain categories such as plain-vanilla, large-cap U.S. equity ETFs, and seeking exemptive relied for these nonsophisticated, simpler strategies could cost $100,000 or perhaps even a little bit less.

But if you deviate from vanilla, it could take as much as $500,000, and a lot more time to get through the process because it would demand more from regulators and attorneys. Time is money here.

There’s no getting around this initial cost unless you are a big firm and acquire a smaller firm that already has exemptive relief. And here’s why, as we’ve covered before:

“Technically, an ETF is an investment company registered with the U.S. Securities and Exchange Commission, because it holds a portfolio of securities and continuously issues and redeems its shares at daily NAV, just like an open-end fund (commonly known as a "mutual fund"). As we have just seen, however, many institutional and all retail investors do not acquire or redeem their shares directly at the NAV from the ETF provider, but instead buy and sell them at their market prices on the secondary market, similar to the way in which shares of closed-end funds are bought and sold. This hybrid structure, consisting of mutual fund and closed-end fund elements, does not fit into the existing regulatory regime governing investment companies. Therefore, each ETF must request and receive from the SEC formal exemptive, interpretive, no-action and other relief from certain provisions of applicable federal securities laws before it can be brought to market. For regulatory purposes, without this relief, each ETF's structure and operations would be illegal.”

 

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