Arrow brings a couple of key attributes to NLET: product development skills and exemptive relief.
Regarding the former, Arrow subadvised the launch and management of four Thomson Reuters/Jefferies ETFs and the Alerian MLP ETF (ALPS was the advisor to all five funds). And in another life, says Arrow CEO Joseph Barrato, several current Arrow executives helped Rydex build its ETF business.
As for the latter, ETFs need exemptive relief from the Securities and Exchange Commission from certain provisions of the Investment Company Act of 1940 that don’t allow the ETF structure. Barrato says Arrow obtained exemptive relief six years ago, but it took its time in rolling out a product until last year’s launch of GYLD. “We have good [exemptive] relief that let’s us go passive or active or to use derivatives,” he says.
Advisors and others who create funds through NLET have the option to use Arrow’s previously–obtained exemptive order rather than obtaining their own exemptive order, which is a time consuming and costly process.
Arrow must serve as the advisor to any ETF on NLET that employs Arrow’s exemptive relief. “We have to make sure they’re abiding by the exemptive rules from the SEC,” Barrato says. “I’ll be holding their hands through the process, and they’ll get expertise from our product development and portfolio team.”
Expanding The Game
The ETF market is booming, and it’s not just the big boys who are bringing products to market. Exchange Traded Concepts, ALPS and AdvisorShares are already out there enabling advisors and others to turn their investment strategies into ETFs.
Barrato and Rogers say they will be selective about who they'll work with. They hope to have about five ETFs on the trust by year-end 2013. “We’re not looking to do every Tom, Dick and Harry product,” Barrato says. “We’ve seen a lot of products get launched that nowhere because the markets didn’t support them.”
Barrato says NLET has been approached with a handful of ideas ranging from an index provider with no assets under management to a large outfit managing billions of dollars.
Finding winning ideas isn’t always easy, as Rogers noted in a prior article about advisors who turn their investment strategies into fund products. With NLET, he says he wants products with a distinctive investment point of view that can attract assets and trade with significant volume.
Advisors and firms who launch investment products through a trust hope to achieve efficiencies that keep their costs down. Rogers estimates it costs $250,000 and up to create an ETF on one's own versus $50,000 to $75,000 via NLET. The benefit of a fund trust for investors, Rogers says, is that trusts can achieve a size and scale that, in theory, can produce lower expense ratios.