Nick Fullerton is a big sports fan. Chances are that many of you reading this article are big sports fans, too. But did you ever think of launching an exchange-traded fund based on your passion for sports? Probably not. Fullerton, the founder and principal at Fullerton Advisors LLC, an independent one-man shop in San Ramon, Calif., did just that.
He and a partner created the ProSports Sponsors ETF (FANZ), which follows an equal-weighed index they devised that tracks the performance of the official corporate sponsors of the major North American professional football, baseball, basketball and hockey leagues, along with broadcasters that have rights agreements with those leagues. The fund started trading on the Bats exchange this past July on the same day as Major League Baseball’s All-Star Game. The fact that a sports-focused investment product trades on an exchange called Bats is purely coincidental. But the fund’s coming out party on a day when baseball’s Midsummer Classic was the focus of the American sports world was intentional.
“We wanted to attract attention both from the sports media and the business media,” says Fullerton, who’s one of a growing number of participants in the financial services industry—from small RIA firms to large, traditional mutual fund companies—looking to capitalize on the explosive growth in the ETF space.
Fullerton’s story of how he took an investment concept from talking point to tradable product highlights the costs and concerns—along with the potential risks and rewards—of trying to create an exchange-traded product. Creating your own ETF might sound like a neat idea, but needless to say it’s not easy to establish a foothold in an increasingly competitive market when it seems that every month brings record numbers of exchange-traded products and accompanying assets under management.
According to exchange-traded product researcher XTF.com, there were 2,037 U.S.-listed ETPs from 116 fund sponsors as of September 29 (the vast majority are ETFs). Total assets in these products were nearly $3.2 trillion, which is more than 24% greater than it was for the same period the year before. And 169 new products launched in this year’s first nine months, while 109 were delisted.
Todd Rosenbluth, director of ETF and mutual fund research at CFRA, says the top three three providers—BlackRock’s iShares unit, Vanguard and State Street—control 83% of market share within the U.S. ETF business.
In short, the prospects for success among small fry outfits launching an ETF seem daunting. But that’s not deterring people like Fullerton and others from trying, and they’re reaching out to companies who can help them do it in a more cost- and time-efficient manner than they could if they did it themselves.
Leap Of Faith
Nick Fullerton’s firm has more than $53 million in assets under management, and most of his clients are young professionals in mid-career who mainly hail from the Bay Area and Southern California. He notes the average age of his clients is about 40, and they’re looking for help with both their investments and general financial planning.
“Most of my revenue and income is from the investment management side, but I also bundle planning work along with that,” he says.
Fullerton says the idea for creating an ETF was sparked by a chat with a friend, Jim Kozimor, an announcer with the NBC Sports Group whose broadcasting résumé includes work on the past three Summer Olympic Games and stints with two NBA teams. Their kids go to school together.
“He stopped me in the school parking lot and said, ‘I’ve got a crazy idea and let me run it by you,’” Fullerton recalls about that meeting in January 2014. “We started talking about sports and he’s making money on it, and I said there has to be a way for my clients to participate in this.”
That prompted them to do some research. “As we looked at sports and the [league] partners and their returns—our research went back to 2005—it was clear that this idea works and we feel it warrants a place in people’s portfolios. I’m always looking for a better mousetrap. I’m a firm believer in passive management and am always looking for better products to help fill the asset allocation bucket.
“It was a leap of faith to go through the effort of doing very extensive research on what the makeup of an index should be; who’s included or not included in it; and to iron out the investment thesis behind it so we can make a rules-based passive product,” he continues. “We had a lot of conversations with our respective wives. We both have great day jobs that we love. But we saw an opportunity to create a product that appeals to both an investment advisor like me who’s very stringent about what to put into people’s portfolios, but also do-it-yourself investors who not only like sports but like to invest.”
And so was born SportsETFs LLC, a partnership between Fullerton and Kozimor that’s responsible for the ProSports Sponsors ETF. But, as Fullerton acknowledges, they needed help in bringing their idea to market. He vetted the concept for the fund with contacts he had in the investment industry, and someone introduced them to Global Index Group, which develops and sponsors index-based products that provide investment options in illiquid asset classes such as real estate.
The company’s founder, Kelly Haughton, helped create the Russell index family while working at Russell Investments. “We engaged with them [Global Index Group] to help build our business case and do a deep-dive back-test and to put a more institutional-type methodology behind the index,” Fullerton says.
Next, they talked to a few asset management firms but ultimately decided it would behoove them to go it alone and try to attract assets, which they reasoned would make their idea more attractive to an asset management firm that could grow it out into a larger franchise.
“We thought of creating our own platform, distribution and trust, and creating the vendors for each stage of the ETF launch process,” Fullerton explains. “Then we heard about these third-party white-label firms where the infrastructure is in place and you just basically bolt on your index. It seemed like a good idea to learn what they offer. If there wasn’t any Exchange Traded Concepts or ETF Managers Group around, this idea would’ve died a quick death.”
Three Criteria
Exchange Traded Concepts and ETF Managers Group are the best known of the so-called white-label, or private-label companies that help investment advisors and money managers turn their investment ideas into exchange-traded products by handling the responsibilities associated with launching and operating an ETF. Fullerton says he and Kozimor did their deep-dive due diligence on both ETC and ETFMG, and ultimately cast their lot with the former.
Based in Oklahoma City, ETC has helped launch 30 funds since it set up shop in 2011. Seven of those funds have closed after lacking market support; one client bought another issuer and consolidated all of their funds into another fund trust, and a couple of others were sold to outside companies. “You can launch a product with us, get it up and going, and if you’re in a position to sell your fund to another fund provider we’ll help with the process and facilitate a move of the fund if needed.” says Garrett Stevens, ETC’s CEO. “We don’t like to have funds leave our platform, but we want to be good partners.”
ETC’s current roster of clients comprises 20 funds with more than $4 billion in assets under management.
According to Stevens, the company’s client list runs the gamut from one- or two-person advisor shops—some of which have a model portfolio they believe could be a successful product—to traditional mutual fund companies.
“We put the client’s name and logo on the fund; we build a custom website for every client so it’s always their branding on it,” Stevens says. “There are no ETC funds, so we’re not competing with our clients in any way. We handle all of the regulatory work, as well as the boards, the trusts, SEC work, the exchange listing process, admin work, accounting, custody, distribution, marketing—everything. We quarterback that whole process.”
Stevens co-founded ETC based on his own personal experience of creating faith-based ETFs that met the investing mandates for some of the small endowments and foundations he served as an independent investment advisor. The suite of five FaithShares ETFs he helped launch lasted less than two years before closing in 2011 for lack of assets. In the process, he and his partner had spent close to $1 million on legal fees to get exemptive relief from certain provisions of the Investment Company Act of 1940 and SEC rules that ETFs need in order to be approved.