Inside ETFs: How To Launch An ETF

January 22, 2017

Operations

There are three main components to ETF operations, according to Sam Masucci, founder and CEO of ETF Managers Group, a private label business.

No. 1 is product design and regulatory approval; No. 2 is pre-launch operation agreements and partnerships—think agreements with a capital markets desk, the custodian, liquidity providers, seed capital source, wholesale distribution, etc.

But finally, there are the day-to-day operations—the in-time creation/redemption mechanism is a crucial process in ETFs. You need to oversee the custodian, and all the financial reporting that goes on in your ETF day in and day out. You also need to oversee trading, as in bid/ask spreads, trading relative to the index, execution on rebalances, etc. You also need to keep marketing materials up to date.

“New issuers seem to struggle the most with daily operations and marketing of a new ETF,” Masucci said. “You don’t make money from operating an ETF, but you have to do it right. You make money from getting marketing materials out there, and gathering assets from that.”

Sales And Marketing

A good sales and marketing plan are perhaps the most crucial element to a successful ETF. It takes more than a name and brand recognition. Consider Russell ETFs—the short-lived lineup of funds that came to market accompanied by the expertise, reputation and the well-known Russell brand, but folded months later.

As Christian Magoon, founder and CEO of Amplify ETFs, put it, the problem in that situation was most likely sales and distribution. Many new entrants to the space don’t research where the bulk of assets are, who is using ETFs, what’s working and what’s not—all elements that should be taken into account in a sales strategy plan. “That’s homework that can’t be done three days before launch,” he said.

It’s important to remember that most institutions won’t even look at your ETF until it has at least $100 million in assets under management. And getting there can take time, so you need to think about your firm’s sales cycle and plan accordingly, Magoon says.

“Initial sales and marketing is a big hurdle that can’t be overlooked,” he said.

The good news is that the ETF sales culture is very different from the traditional fund sales culture. ETF sales are more about asset allocation, and how the ETF fits within an allocation and within sector constraints, Magoon says.

It’s a more detailed, consultative, numbers-oriented sale, rather than a traditional fund sale. A well-built product helps to sell itself.

Contact Cinthia Murphy at [email protected]

 

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