How ISE Builds ETF Partnerships

March 08, 2016 I was actually thinking “incubator.”

Monaco: Yes; incubator, because sometimes we'll come up with the idea and plant it, or sometimes people come to us with an idea and we like it and we'll help nurture it. It's really a way to enable the creation of ETFs with emerging managers, who may be entrepreneurs who have had different roles in the investment management space.

They could be executives that have left a longtime position at an ETF issuance shop. It could also be firms that are looking to break into the ETF space. They could be an ETF model portfolio manager that wants to bring out a one-ticker solution product, foreign firms that want to establish a beachhead in the U.S. or mutual fund companies that just aren’t wired for ETFs but need to establish a presence.

We're talking to quite a few firms now that could use our support—maybe not as much on the financial side, but in all the other areas—to help get the product going.

Our biggest one, of course, has been the PureFunds ISE Cyber Security ETF (HACK | C-32). The timing has been awesome and very fortunate. But we never count on that. Our goal is to participate in as many smart products as we can, even if it’s a smaller amount. Because when we're investing, we're investing in our partner. Good ideas come from good people. And once we find a good partner, we want to expand the relationship.

With PureFunds, after the video game tech and drone tech funds launch, it'll be six products, and there are more coming.

Same with YieldShares. We’re working with Christian Magoon on the Amplify-branded online retail ETF.

We’re working with Brad Loncar for Loncar Investments and the Loncar Cancer Immunotherapy (CNCR). We worked with Tierra XP to launch the Tierra XP Latin America Real Estate ETF (LARE).

All of these firms are either young firms, or established players that don't have a presence in the ETF space, and we get to help them grow their product. We're not diluting their interest in their firm. We're not pushing for an exit strategy. We're not asking them to sell something. We're not asking for a board seat.

We're looking for a long-term relationship. If things are going well, there's no exit strategy. The only exit strategy is when things aren't going well and the fund has to be closed or changed. So they're not hiring you, they're partnering with you.

Monaco: Absolutely. Does that mean you’re selective about who you partner with?

Monaco: We are. We hear a lot of ideas, and sometimes they're good ideas, but we have to ask “How will you participate in the growth of this? It still has to be built out. There's a lot of work and resources that have to be spent in order to do this. What's your plan?” If they say, “Well, I don't really know,” we politely decline.

They have to have some experience in investment management, because otherwise managing expectations becomes super difficult. A lot of people come to us and they think they have the next billion-dollar idea. Well, they may, but when do you think it's going to be a billion dollars? Because if you're going to tell me by year one, two, three, forget it. It may happen, but never, ever count on something like that happening. How do you build indexes around such specific spaces like cybersecurity or video game technology?

Monaco: The team becomes equity analysts in the space. They dive right in. They're calling the investor relations teams of these firms. They're reading through financial statements. They're reading through marketing material, any research report coming from the sales side from equity analysts actually covering the space already.

The goal is to immerse ourselves in it as if we're covering this space. Because that's what people want from us: They want us to understand the space. What do you see for the future?

Monaco: Certainly expanding existing relationships is a priority. There's a wealth of intellectual property just waiting to be commercialized, but not all of it will work.

We have our own pipeline of ideas that we also want to commercialize and maybe find new partners to help do that, because they'll be the face of the product, or they're a subject matter expert as well.

The activity that we've done so far is just the tip of the iceberg in terms of how a venture role will help influence the future of the industry, in a very positive way. There are great ideas out there that aren't being heard and aren't being commercialized. There shouldn't be all this concentration among the top three issuers.

That's a huge opportunity, and I'm not going to claim that we'll have tens of billions of assets in our products, but it doesn't take that to be successful and to provide benefits to investors.

Contact Heather Bell at [email protected].

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