Launching an ETF ‘Takes a Village’

“It takes a village to raise an ETF,” Morningstar’s Ben Johnson said as part of the “ETF Infrastructure: Mastering the ETF Ecosystem” panel at the Exchange conference in Miami Beach, Florida on Sunday.  

He was joined by Nichole Kramer of SS&C ALPS and Michael Prendergast of Ultimus Fund Solutions, who explained some of the nuts and bolts of creating an ETF. 

One of the key decisions is whether to start your fund from the ground up or to use a series trust that has been established by a white label issuer. Starting an ETF on your own can involve many moving parts, according to ETF Senior Product Specialist Prendergast, including appointing a board, hiring your own services providers, renting offices to house your own operations, among other responsibilities and requirements.  

“If you don't necessarily have the expertise in your shop, or you don't necessarily think you have the time to actually dedicate to that process, a quick way may be going into a series trust where you are utilizing [an] established board, establish a CCO [chief compliance officer] to establish a process as a turnkey solution.  

“They can leverage certain providers that may already have contractual relationships with the trust,” he said, noting that those using the services of a white label issuer can still make choices around things like selecting an auditor, a custodian or distributor.  

Using such a service can take as little as five months to bring the first product to market, while building the operation from the ground up generally takes six to nine months, Prendergast adds. 

Distribution Is Key 

Kramer, an assistant vice president focused on ETF distribution and operation services, says issuers need to get distribution right. 

“This is probably the one thing we see people fail on quite a bit—if you don't have a good active distribution, you're not going to succeed,” she said, adding that the ETFs that enter the market and automatically succeed are very few and far between.  

Kramer expects to see more ETFs moving to the floors of exchanges and that semitransparent ETFs will see more growth once the SEC approves foreign securities in such structures. She also says that with Vanguard’s patent on a mutual fund structure that includes an ETF share class expiring, she would like to see the SEC streamline the process so that it becomes easier for other firms to follow suit. 

Contact Heather Bell at [email protected]