Keeping The Trains Running
You will also need to establish what the day-to-day operations of the funds will look like. The key thing for ETFs is the daily construction and maintenance of the creation/redemption baskets. The best sponsors have integrated their investment process with the basket process and provide support and service to the capital markets.
This work can be completely outsourced to a subadvisor and fund administrator, or the majority of the work can be done in-house, though typically the fund administrator plays the role of liaising with the National Securities Clearing Corporation to disseminate the daily basket files to APs, market makers and other capital markets participants. There are a number of operational issues that will need to be addressed that are unique to ETFs across various areas including custody, fund accounting, tax, risk and compliance.
If you’re going to launch an index-based ETF, you will need to select an index or work with an index vendor to create a new one. Even if you have your own index methodology, you will probably still need to work with an index vendor to calculate and disseminate the index and its data. You will need to select an exchange to list your ETF for trading, as well as line up APs and market makers to help provide liquidity. You will also need to select an indicative intraday NAV (IIV) agent, a requirement of the exemptive orders to provide updated pricing estimates for the fund’s NAV at least every 15 seconds throughout the trading day.
Another requirement of the exemptive orders is a publicly available website with certain key information about the ETF. You’ll also need to source seed money to get the fund launched, something that has become increasingly difficult as ETF trading has gone electronic, economic incentives have changed, and newer ETFs have been slower to attract the type of trading volume that has historically been attractive to market makers.
The number of people you will need, the amount of money it will cost and the amount of time it will take to launch your ETF can vary widely based on the type of ETF you’re looking to launch, the nature of your organization and what your metrics for success are.
Generally speaking, you’ll need someone to oversee the day-to-day operations of the funds—including service providers, APs and market makers on the capital markets side, as well as investor inquiries that can’t be addressed by other service providers. You’ll also need some form of sales support—either dedicated sales professionals or ETF specialists—who can support your sales professionals and your marketing effort. A startup organization may have just one of each type, while a large asset manager new to the ETF space may have specialists who focus on different areas of operations, capital markets, sales, marketing, legal, compliance, etc. A number of costs are fixed regardless of the number of funds, while others are specific to each fund.
The Finished Product
So what’s the butcher’s bill? Initial startup plus first-year expenses will be at least $300,000 for a single ETF just to get a fund launched. You’ll still need to spend money on a sales and marketing effort, which is typically the largest expense, as well as the one with the most variability. As for timing, the biggest factor is typically the SEC and the review process. Outside of that, four to six months is generally enough time to hire service providers, establish daily process flows and finalize a distribution strategy.
Is it a lot of work? You bet. But the end result is your very own publicly traded exchange-traded fund. Good luck!