From the ashes of FaithShares Trust, which last Friday both changed its company name and closed four of its five exchanged-traded funds based on Christian values, comes Exchange Traded Concepts (ETC), which on Monday unveiled a new platform designed to let investment managers, financial advisors, foreign managers and others to create their own ETFs in as little as 75 days.
The service, ETF-in-a-Box, aims to cut through the red tape and to cut costs to enable subadvisors to bring investment ideas to market under their own brand names.
"It's a full turnkey solution where we do everything from creating the web site to launching the funds," says Garrett Stevens, ETC's chief executive. He notes it currently takes between one to three years and roughly $1 million to launch an ETF.
ETC's model is built around its existing exemptive relief status with the Securities and Exchange Commission to bring ETFs to market. Not all aspects of ETFs are consistent with the requirements of the Investment Act of 1940 that governs open-end funds. As such, ETF providers must go to the SEC's Division of Investment Management to file for exempted relief from '40 Act provisions dealing with redeemable securities, trading only at net asset value, and fund transactions by affiliated persons. (ETF organizers also must file for exemptions for rules under the Securities Exchange Act of 1934, and other regulations.)
"Once you have the exemptive relief, the SEC review process is 75 days versus someone starting from scratch to apply for exemptive relief to launch ETFs, which can take one to three years," Stevens says. "For groups like us who already have that relief, the SEC said you can launch any products you want that fit within that relief. For us, that means we can launch passive U.S. and international index funds."
These funds will be under the brand name of the subadvisors who hire ETC to create them.
The price tag to create a new ETF through ETC could start at less than $100,000, but Stevens says that could go higher based on the type of index underpinning a particular ETF, a fund's complexity, whether the subadvisor needs ETC to provide trading services, and the number of funds launched.
ETC will be responsible for the funds' operations, and SEI Investment Distribution Co. will handle the backoffice chores and distribution. Stevens says ETC's fees range from ten basis points on the high end to less than that, depending on the number of funds being launched. He adds that SEI charges its own fees based on the type of product launched.
Stevens notes he's had ongoing conversations with about 20 subadvisors interested in launching their own funds. He adds that he hopes to make filings within the next few weeks for three different subadvisors seeking to create roughly ten new funds.
FaithShares Trust, an Oklahoma City-based investment company, made news in December 2009 when it launched a suite of five faith-based exchange-traded funds. But the company decided to close the funds because they didn't attract enough assets. The FaithShares Baptist Values, Catholic Values, Lutheran Values, and Methodist Values funds closed on Friday. The FaithShares Christian Values fund will close by the end of August.
"We've been working on this [the ETC model] for the past three or four months as we transitioned out of the FaithShares model and getting those funds closed," Stevens says.
To further break with its past and to usher in its new beginning, FaithShares last week officially renamed itself Exchange Traded Concepts.
Stevens says that despite the lack of success with the FaithShares ETFs, his company got numerous inquiries from others asking FaithShares to launch funds for them. "We started thinking a lot of people would be interested in doing this," he says. "It's sort of the democratization of the ETF business."
Stevens says the three largest ETF providers--iShares, State Street and Vanguard--control 85% of the assets. He adds there are only 29 U.S.-based ETF providers, or a tiny fraction of the number of mutual fund providers in this country.
"It's an industry still in its infancy," he says. "It took 18 years or so to get to the first $1 trillion in ETF assets, and it's predicted that will double to $2 trillion in the next five years. So there's a lot of people who want to get into this business."