Chief among them is who owns an ETF at the end of the day—a question ETF.com’s Dave Nadig addressed in a blog. But could this happen again?
It has certainly happened before. About a year ago, AdvisorShares and TrimTabs went through a similar break over the now-named AdvisorShares Wilshire Buyback ETF (TTFS), where AdvisorShares replaced TrimTabs as subadvisor for the fund with Wilshire Associates. Methodologies changed, the ETF got a new name and new advisor, but the ticker remained.
Sponsor Has Limited Control
At the time, AdvisorShares offered no clear reason for the decision other than to say its board found it in the best interests of investors. TrimTabs objected, citing shareholder “disappointment” over it, but then moved on.
AdvisorShares in this case, and other so-called white labels, are essentially third-party ETF providers that offer all the infrastructure and services—including exemptive relief, portfolio management, compliance, accounting, and all the aspects that go into bringing a fund to market—to ETF sponsors who don’t want to build the infrastructure from the ground up as well as pursue regulatory exemptive relief. It’s costly and timely.
Fast-forward now to the PureFunds ordeal. As more and more would-be fund sponsors look to enter the ETF space for the first time, one key takeaway from these events is that in a white-label-provider relationship, there’s only so much you can control as the sponsor of a fund.
But more importantly, different white-label ETF providers offer slightly different services. We talked to three of these providers, including ETFMG’s Sam Masucci, who is at the center of the ongoing PureFunds dispute. Knowing the differences between them is crucial when picking an ETF partner.
Exchange Traded Concepts
Garrett Stevens, head of Exchange Traded Concepts, a white-label service that currently has 20 ETFs in the market, commanding about $3.5 billion in combined assets, says what’s happening to PureFunds shouldn’t happen at all. Provider due diligence is key, he says.
“At ETC, this would never happen. And there are several reasons why. The most basic reason is that our agreements with our clients include very specific protection against this. We're not taking their fund; we're not going to utilize their intellectual property; we're not going to give their index license to anybody else; and we're not going to replicate that index on our own without them. All of that is in our agreements.
Now, the ’40 Act is very specific in that we can't tie the board’s hands. We can't say, ‘We will never, ever fire you,’ because that's really the board's decision, not the advisor’s necessarily. We are the advisor—we are not on the boards—but we can tell them, as the advisor, that we're not going to recommend that type of action. Unless, of course, there’s nonpayment of bills by the client, or something like that.
But the big point for us is that this is our business, 100% white label. We have no product of our own. We don't intend to ever have any products of our own. So we're not competing with our client. You're not going to see any ETC-branded products out there. To that end, our sole job is customer service. It’s making sure these funds run within the regulatory construct; that they run in the most economic and efficient manner for our clients.
What’s different—and I can't speak for ETFMG—is our focus. We are stewards of our client funds. They've entrusted us to launch these products with their name on them. This is their reputation. It's their business. It's not really different than any other service-provider-type relationship. From a ’40 Act and technical perspective, yes, we are the ones managing it, and it's our neck on the line with the regulators, more so than our clients’. But our focus is on client service and making sure that their funds are representing them and their brand, not ours.
It’s surprising to me this could happen, because the first time we took someone else's fund or fired one of our clients from their fund, I can't imagine ever getting another new client after that. When you're looking to choose a provider, look at their board, look at their relationships with their current clients. That will tell you more than anything.”
ETF Managers Group
Sam Masucci, head of ETF Managers Group, argues it’s all going down according to contracts. ETFMG manages 11 ETFs with some $1.5 billion in combined assets.
“‘White-label ETF provider’ is a broad umbrella, but my business and ETC are vastly different. ETFs are issued by trusts, and those trusts are governed by a board that typically has independent trustees and affiliate trustees. ETC doesn’t operate a series trust, they rent them. Garrett doesn’t have a seat on those trusts, so they are significantly removed from the governance of the issuance of securities.
Conversely, our funds are issued out of the ETF Managers Trust. I’m a trustee. I’m going to have a greater level of the operational control of the ETF than Garrett would. That’s the core difference.
I also do the portfolio management in-house, whereas ETC rents portfolio management. I have a broker-dealer, and we sell our securities here. ETC doesn’t do their wholesale. ETC brokers services; we provide the majority of the services.
Because of that, our contracts clearly state that these funds are issued, operated and very much in the control of ETFMG. There are specific provisions in our commercial agreements that preclude our partners from interfering whatsoever with the operation of the fund.
We can end the relationship with any partner and terminate the commercial agreement, but that’s not the same as closing a fund. The security is not governed by that commercial agreement. The security is governed by an advisor agreement and the trust board’s interest in issuing it. We have every right to continue supporting funds even if the relationship with the partner is terminated. Public securities cannot be governed by commercial agreements. It’s only the board that can decide to close a fund or make a change. That’s why I made the decision when we started this company in 2012 that we wouldn’t rent trusts and boards, but we would create our own trust, I’d have a seat as an affiliate trustee, and we would have independence, and a greater level of control of the operations.”
Phil Bak, head of Exponential ETFs, a firm that doesn’t consider itself a full-fledged white-label provider, but one that considers partnering in ETFs that fit their overall expertise and goals, sees the dispute between ETFMG and PureFunds as a black eye on the industry. Exponential has two ETFs in the market, and is wholly owned by ACSI Funds, an asset manager of ETFs and hedge funds.
“It’s shameful what happened. There was no ambiguity about the relationship, the roles and what ETFMG was selling when the fund launched. The fact is that it’s a lot sexier to be a $1 billion asset manager than it is to be a service provider that’s offering operational support for an up-charged fee, and that seems to be the driver for the change from ‘your ETF your way; we are not competing with our clients, we are client focused’ to what we are seeing now.
Our business, Exponential ETFs, is not a traditional white-label shop. We will selectively partner with asset managers whose ideas are complementary to what we do, and match our expertise. But we are not actively seeking white-label deals in the traditional sense.
In our model, all of our standard contracts include language that protects our partners. We’d never act in that way, but we don’t have our own trust—we partner with U.S. Bank. Their board has final decision on certain aspects of the funds, but we have exemptive relief, and we have a broker-dealer, so we have certain controls on our end. Our model is a little different because we are not trying to mark up operational services for a small fee. We are investing in the long-term success of Exponential ETF’s products.”
For investors, this is a lot of inside baseball. But for an investment professional looking to get into the ETF business with a white-label provider, it's clear there are significant differences between competing solutions. This space is hardly vanilla, and each firm operates differently.
Contact Cinthia Murphy at [email protected]