Issuers Employ 'ETF-In-A-Box' Service

May 15, 2015

Six years ago, J. Garrett Stevens, CEO of FaithShares, had just launched his first ETFs. He and his partners sat back, counted their victories, and eagerly waited for investors to bang down the door to buy up the funds.

They never did.

The rest of the story is all too familiar. Stevens and his partners had spent far more than they anticipated on getting their funds to market, with little left over to make sure investors actually knew the funds existed. As a result, the five FaithShares ETFs, despite solid performance, failed to accrue enough assets to survive. FaithShares shuttered its doors in 2011.

But a funny thing happened on the way to dissolution.

"People started calling, wanting to know if they could buy our exemptive relief," said Stevens. "Or they wanted to know if we could consult and help them launch their own funds, since we'd already been down that road."

That gave Stevens an idea: a white-label service that would shoulder the burden for would-be ETF providers looking to launch their very own funds. Thus was Exchange-Traded Concept (ETC) born.

Founded in 2011, ETC offers an "ETF-In-A-Box" service that slashes the time it takes to launch a passive index ETF to just three months, while shaving as much as 90% off the associated costs of filing.

"ETC came out of a very painful time for us," said Stevens. "But it gave us perspective, too. We were able to make lemonade out of lemons."

How It Works
Launching an ETF is not for the faint of heart—or those with empty coffers. Most funds can take anywhere from one to three years to traverse the necessary regulatory channels to make it to market. Startup costs range from $750,000 to $1 million, estimates Stevens, which includes legal fees, due diligence costs, listing fees, seed funds, the associated audits and so on.

By using the ETF-In-A-Box platform, however, the cost to bring an ETF to launch—soup to nuts—is roughly $100,000. Furthermore, most funds can be launched in just 75 days.

It's possible because ETC already possesses exemptive relief, the most expensive and time-consuming piece of the legal puzzle in launching an ETF. Obtaining exemptive relief can take months—even years—of ping-ponging between lawyers and the SEC, but once in hand, it covers any similar ETFs a firm might launch.

 

 

ETC retained its passive exemptive relief from FaithShares, meaning that for most index-based funds, the firm can knock the prelaunch back-and-forth down to a 75-day window. (Active funds, however, require additional approvals, and can take up to six months to process.) ETC also possesses exemptive relief for a range of other funds, including active, fixed income, long/short, 130-30 and fund-of-funds.

"Basically, we can launch any type of fund that clients would like," said Stevens.

Having the pipes and plumbing in place significantly reduces ETF launch time and cost. Legal fees are drastically lower, since counsel and service providers already have the necessary paperwork complete. Plus, ETC's existing trusts—under which many funds are registered—have already performed the required audits. "We've nailed down a pretty good road map, a template that saves us lots of time in drafting documents, and so on," noted Stevens.

The savings can be critical, especially for new ETF providers. "With more ETFs out there, it takes longer and longer for people to find your product. You need the time and capital to get out there and market," said Stevens. "If we'd had a platform like this at FaithShares—where, instead of spending almost $1 million to get going, we could've spent only $100K, then spent the rest on marketing—maybe our products could have lived."

Expertise
Shepherding a nascent fund through SEC approvals is only part of the ETC package. Stevens and his partners also guide providers through marketing, operation, compliance and distribution of funds, as well as how to handle the critical days post-launch.

"I can tell clients what they should and should not do, because I have the scar tissue to prove it," said Stevens.

ETC rolls up its sleeves to help fledgling providers in a variety of ways, including refining concepts into marketable ideas, making introductions to and soliciting feedback from potential market makers, and acquiring seed capital. Plus, working with ETC nets clients significant discounts from service providers, such as accounting, distribution and legal advice.

"For a first-time ETF issuer, it was good to have someone with ETC's experience in bringing ETFs to market—to learn important success drivers and avoid potential pitfalls," says Mazin Jadallah, CEO of AlphaClone, which launched its $131 million Alternative Alpha ETF (ALFA | D-62) through ETC in 2012.

Travis Briggs, CEO of Robo-Stox, agrees. "Launching a successful ETF takes more than a good investment idea. Like any other business, back-office operations are critically important," he said.

Briggs worked with ETC to launch the Robo-Stox Global Robotics and Automation ETF (ROBO | F-20) in 2013. The fund now has $122 million in assets. "ETC manages much of the back-office operations for ROBO, and it has proven reliable and responsive. Also, through its knowledge of the marketplace and pricing power, ETC could provide better pricing with the highest quality vendors. That's something we couldn't have done as a first-time ETF startup," Briggs noted.

 

 

A Range Of Clients
To date, ETC has launched 17 funds for clients, totaling almost $2.5 billion in assets under management.

Its customers range from one- to two-person shops to some of the world's largest money managers. Research firms, index providers and RIAs have all sought ETC's assistance, as well as established international ETF providers such as Source and Horizon, both of whom wanted a larger foothold in the States.

"We're getting more and more interest from foreign ETF providers and money managers," noted ETC's Stevens. "They don't have experience with the U.S. regulatory environment, so they don't know what's needed, or even who to talk to. Working through our platform is a great turnkey solution."

Another growth area, says Stevens, are bespoke funds for RIAs looking for different distribution options for their strategies. Tiedemann Wealth Management, for example, requested an ETF built around a custom index of undervalued stocks of its choosing, into which it could move client assets. Hence the Deep Value ETF (DVP | F-55).

"For them, it's more efficient to make one trade in an ETF than to trade a bunch of smaller client port-folios," Stevens said. "Plus, anybody with $25 can buy one share. It's a whole different distribution avenue."

Looking Ahead
Things are busy at ETC these days. Six ETFs are scheduled to launch through the second quarter, including its first active ETF. It's also signed three new clients, each of whom intends to launch several funds.

"It's possible we'll double the number of funds traded by the end of this year, and potentially the assets in them as well," noted Stevens.

That success is encouraging, but if clients want to move on, Stevens doesn't mind.

"If clients want to launch their first few products with us, then launch on their own after that, we absolutely understand," he said. "At some point, it does make sense. But ETC is a great way to get started in this business, to hit the ground running."

 

 

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