New Fund Structure Akin To An ETF Incubator

February 02, 2017

Christian Magoon is the founder of ETF issuer Amplify. He also created the YieldShares High Income ETF (YYY), a fund with $126 million in assets under management (AUM). Last month, Magoon and his firm filed to start a new fund structure that’s essentially a unit investment trust (UIT) that will convert to an ETF once it hits a certain AUM threshold and reaches its one-year anniversary. caught up with him at Inside ETFs in Florida to discuss this new idea. Let's talk about this new ETF structure you filed for. Has the structure been approved by the SEC? Or is this literally a whole new ball of wax?

Christian Magoon: So it's using two existing structures that are approved, which is an index-tracking unit investment trust, not unlike what the PowerShares QQQ Trust (QQQ) or the SPDR S&P 500 ETF Trust (SPY) is built on.

And then on the other side, there’s a traditional index-tracking ETF. The new technology is this conversion trigger that takes an index-tracking UIT and converts it into a traditional ETF. The conversion trigger is what we're applying for exemptive relief for. That's what our patent application is based on. Why not just launch an ETF?

Magoon: The big advantage for launching what we call our ACES product—Amplify Convertible Equity Securities—is really threefold.

No. 1, seed capital: Instead of needing about $2.5 million to seed an ETF, it's about $150,000 for an ACES product. So, cost advantage on seed. No. 2, operational capital: It's about $250,000 a year to operate an ETF. ACES will be probably about a $50,000 one-time fee to operate the fund. So operating is quite a bit less. And then, the startup costs are probably only about $10,000-15,000 versus a traditional ETF of maybe $80,000.

It will be about 10% of the cost to do an ACES product versus a traditional ETF. And yet you still have an index-tracking investment that's transparent, that has the tax efficiency of an ETF, that'll have a ticker and tracking ability of an ETF. And then it has the option to convert into an ETF if it passes the minor league, so to speak, and gets into the majors.


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