Inside ETFs: How To Launch An ETF

January 22, 2017

Only Good News

The reality is that digitization, lower fees, an ongoing shift to passive investing, regulation and demographics are all trends that benefit the outlook for ETFs. They will be crucial to the future of asset management.

“This is a tough market to be in, but it’s an even tougher market not to be in,” Brashaw said.

So, how do you launch an ETF? In the last year alone, there were some 220 new ETFs launched, and the market attracted a record $284 billion in inflows.

A panel of industry veterans offered four things to consider when launching an ETF:

The Index

To Nasdaq’s head of indexes, Rob Hughes, the success of the ETF industry has largely rested on the ongoing “massive” shift from actively managed to passively managed products. “It’s an index-based world,” he said.

Today indexes are ever-so-important to advisors and investors who are turning to passive investment strategies like never before. That makes picking or designing an index an integral part of launching a successful ETF.

“If you are thinking of entering the ETF space, the index is your calling card,” Hughes said, noting the challenge of standing out in a vast ocean of nearly 2,000 ETFs. Index providers are now integral to the ETF creation process.

The good news is that construction capabilities have never been better to create an index and an ETF, and index providers are well-positioned to help support your new ETF once it’s launched. Again, the index and the relationship with the index provider are crucial.

Regulatory Concerns

Everyone who gets into ETFs needs exemptive and other regulatory relief from the SEC, which today is a pretty straightforward process, said Jeremy Senderowicz, partner at Dechert.

But a new issuer also needs a package of compliance procedures, which can be a steep learning curve. For example, as an ETF sponsor, you would have to monitor intraday trading, something that’s new to mutual fund sponsors.

The creation/redemption mechanism is unique to ETFs; operations are different, trading is different—all components that require a lot of compliance work, and often require establishing key partnerships with various service providers even if you already have a mutual fund platform.

“Getting these partnerships set up can take just as much time as it takes to get regulatory relief,” Senderowicz said. “It’s not that simple. Your time to market is as determined by these practical factors as it is by exemptive relief.”

 

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