How A White Label ETF Provider Works

The growing role third-party providers play in bringing new ETF ideas to market.

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Reviewed by: Cinthia Murphy
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Edited by: Cinthia Murphy

New ETFs are launched often, and many of them aren’t coming to market through established issuers such as iShares and State Street, but rather through third-party providers who help new entrants build up their ETF franchises one ETF at a time. Sam Masucci, head of ETF Managers Group, a white label ETF provider, tells us how it works and why it makes sense for newcomers to go this route. ETF Managers Group today is the issuer behind 14 ETFs, with about $840 million in total assets. 

 

TickerFundBrandExpense RatioAUM
HACKPureFunds ISE Cyber Secirity ETFPureFunds0.75%$734.20M
SILJPureFunds ISE Junior Silver (Small Cap Miners/Explorers) ETFPureFunds0.69%$59.12M
IPAYPureFunds ISE Mobile Payments ETFPureFunds0.75%$46.97M
RISESit Rising Rate ETFSit1.50%$10.63M
IFLYPureFunds ISE Drone Economy Strategy ETFPureFunds0.75%$8.01M
GAMRPureFunds Video Game Tech ETFPureFunds0.75%$7.59M
ETHOEtho Climate Leadership U.S. ETFEtho0.45%$6.85M
ITEQBlueStar TA-BIGITech Israel Technology ETFETF Managers Group0.75%$4.90M
LARETierra XP Latin America Real State ETFTierra0.79%$2.62M
WSKYSpirited Funds/ETFMG Whiskey & Spirits ETFETF Managers Group0.75%$2.35M
BIGDPureFunds ISE Big Data ETFPureFunds0.75%$2.31M
FINQPureFunds Solactive FinTech ETFPureFunds0.68%$2.30M
IMEDPureFunds ETFx HealthTech ETFPureFunds0.75%$2.30M
BITERestaurant ETFETF Managers Group0.75%$1.38M

 

ETF.com: Tell me the gist of how a white label service like ETF Managers Group works. Why should someone bring an ETF to market with you?

Sam Masucci: What a new issuer or entrant into the ETF space needs to think about is, do they want to go through all of the time and money associated with getting into the space?

That means getting regulatory approvals, and building up the infrastructure, including compliance, fund accounting, legal, as well as all of the operational and portfolio management responsibilities. There are a lot of costs associated with all of that.

Typically, to set something up from scratch, you're looking at two years and $2-3 million of upfront cost. You’re going to have to hire seasoned ETF-skilled people to run legal, compliance, trading, wholesaling and operations.

What we provide is a solution for people who want to get into the space but don't want to go through the pains of creating all of that on their own. It's a tremendous economies-of-scale business.

The cost to run one or two ETFs, from an operational standpoint, is the same as running 20 ETFs. It's very costly when you're running one or two, and a lot less costly when you're running significantly more than that.

ETF.com: How much does it cost to launch an ETF with your firm?

Masucci: When someone comes to ETF Managers Group, they're looking at 75 to 90 days to market for a traditional ’40 Act ETF. The cost is less than $100,000; it's usually around $75,000. That compares to a couple of years and $2-3 million of capital expenditure if you’re doing it from scratch. And from an ongoing standpoint, we can run a fund for around $250,000 a year. That covers everything.

It’s a very cost efficient way for people to bring ideas to market. And I've been in the ETF space now since 2002. My more senior management here has been in there that long as well. One of the attorneys on staff, my partner in the business, wrote the first iShares prospectuses.

We've been in the business a really long time. We have great third-party relationships with custodians like US Bank, and with auditors like WithumSmith and Brown. All of that saves time and money.

 

Now, we're not the only ones providing private label services. We just do it differently. We’re a comprehensive service—all aspects of the fund are being handled. That includes engineering the product before it launches; indexing it, if it's an indexed product and they don't have one already in place. We do portfolio management in-house. We have a dedicated group of registered reps that do our wholesaling.

That’s a huge benefit, because these funds are sold, they're not bought. There are more than 3,000 ETFs globally and you're constantly fighting for shelf space with the RIAs and the advisors. We do that.

ETF.com: Who’s your biggest competitor today?

Masucci: I don't consider our competition to be the iShares and the Vanguards of the world, because they're coming up with their own ideas; many of those are built off of mutual funds they've offered into the space. They're very much building the iShares and the Vanguard franchise with their own product ideas.

People come to us because they want their own ETF franchise, but they don't want to deal with all of the associated operations and relationships and skill sets.

In the case of other private label service providers, I don't think we have any competition, because none of them offers the level of comprehensive services we have. For instance, we're the only one that offers commodity pool products. We have ’33 Act products, which are futures-based ETFs.

ETF.com: How does the math work? You’re the intel, the operator behind the scenes, and, say, PureFunds is the brand. In a fund like the HACK [PureFunds ISE Cyber Security ETF], with some $800 million in assets, how much do you get, how much does PureFunds get?

Masucci: Our clients don't pay us anything, unless of course a fund is launching; so therefore, it has no current revenue. If it's below its breakeven asset level, that's the only time a client writes us checks.

Outside of that, in the case of HACK, for example, we're the advisor. We control the prospectus, we're the face with the regulators. So, the gross management fee from HACK comes to us. We pay PureFunds their piece for their role in the fund. We also pay Nasdaq, which used to be ISE. They're entitled to a piece because originally the idea for HACK was an ISE idea. And we pay all of the third-party service providers.

ETF.com: Where’s the risk? If the ETF fails, who is on the hook: you or the client?

Masucci: Typically when a fund doesn't work, which means it failed to gather the necessary assets to be sustainable on its own, there's a cost associated with that. That cost is borne by our clients. Ultimately, regarding shutting the fund down, we're the issuer and the advisor, so we do that. That's why we're very selective, because we don't want to throw a lot of things up there and see what sticks—we'd prefer to invest in winning ideas.

ETF.com: You have 14 ETFs on the market today. HACK is hugely successful, but the other 13 have combined assets of about $40 million—there are a lot of small funds. Is that a concern? What's the biggest challenge to getting traction?

Masucci: Some of it is market-driven. Sometimes you launch ideas that are ahead of their time or out of favor; they just take a little more time to become an interesting play. We have to educate the market on why these funds are important within a portfolio.

The challenges we face versus some of these larger firms, a BlackRock or a Vanguard, are no different. It's all about visibility, shelf space, growing market education. Every ETF company has what we have: They have usually one or a handful of very large ETFs, and then the bulk of their ETF lineup tends to be much smaller assets, because they're still growing them.

 

ETF.com: I'm sure you get pitched a lot of different ideas. How do you pick what’s a viable investment strategy?

Masucci: The first thing we do is an analysis of the potential client's investment idea. We'll look at what the portfolio's made up of. We'll look at the investment theme. Everyone who comes through the door thinks they have the greatest and best idea, and many times there are three or four very similar products already out there. We want to make sure that, whenever possible, they have first-mover advantage. You want it to be unique in the space.

You want to make sure it’s priced right. There are a lot of discussions around price compression, and sometimes clients will come in with a thought that their ETF should have a much higher gross management fee than we think the market is willing to pay.

Once we're past those hurdles—and we'll do market analysis through our wholesale group to see if we build this—will people be interested in investing in it? It's a rigorous process.

ETF.com: Any tough lessons along the way? Any advice for those considering entering the ETF space?

Masucci: When I look at your league table over the last 24 months, and those ETF companies that didn't make it, I think a number of those principals should have come to us or someone like us.

Everyone thinks that "I have such a great idea," and they build these business models on unrealistic asset-gathering timetables; they put together this hockey-stick AUM growth chart. If your business model requires that, then there's a good chance it's not going to work.

With over 3,000 ETFs, you're not guaranteed that every one is going to gather assets. And if they are, you don't know what the timeline's going to look like. We always tell our clients that they should be prepared to support the ETF for two years—that’s how long it could take for a fund to reach its breakeven level.

ETF.com: Looking ahead, what are some of the trends you're seeing in terms of product development in ETFs?

Masucci: We'll continue to see more in the commodities space, especially now as interest rates begin to move, and bond prices and rates adjust. With the possibility of inflation coming back into the market, there's going to be more demand for commodity products and real-returning assets.

I also like the thematic idea. When I started in this business in the late ’80s, I was an advisor at Merrill Lynch. Back then, your job as an advisor was to pick two or three individual stocks—a high growth opportunity, an emerging market opportunity and maybe a high-dividend payer.

Over time, advisors learned they were much better at gathering assets through asset allocation. They're well-entrenched now in leveraging the power of ETFs and indexing as a way to fulfill their clients' portfolio needs. There are tremendous growth opportunities for ETFs.

For newcomers in the space, I always tell them they're not going to make money from operating the ETF. Not in the compliance, custody, operations and legal behind an ETF. That’s what we do. They're going to make money from educating the market with a powerful wholesale force, which leads to trading and gathered assets. That's where the money is.

Contact Cinthia Murphy at [email protected]

 

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.