Exchange-traded funds typically aren’t associated with eggs, or butterflies for that matter. But a new structure developed by Christian Magoon at ETF provider Amplify Investments brings both to mind regarding what he believes is a new way to bring ETFs to market.
First, the egg. The new structure is called ACEShares, or ACES for short, which stands for Amplify Convertible Equity Securities. This is a patent-pending format that incubates index-tracking investment products in the form of unit investment trusts. For people who want to turn an investment idea into an ETF, the ACES route that entails first placing that idea inside a UIT is marketed as a way to create ETFs with lower costs, seed capital requirements and break-even points than a traditional path to ETF status.
“The big difference is it will trade at the end of the day like a mutual fund or a traditional UIT,” Magoon explains. “But it has a transparent portfolio, tax-efficiency and will have a ticker like an index-based ETF. And it will have an ETF-like expense ratio.”
Regarding the butterfly, the incubation period when these products trade and try to attract assets is akin to the chrysalis stage in that creature’s lifecycle because when these UIT vehicles hit pre-determined asset levels and/or time periods, then voilà—it will re-emerge with a new body, so to speak, as a full-fledged, index-tracking ETF with intraday trading on the exchanges.
“If an ACES product doesn’t reach the prospectus-based trigger to convert into an ETF, then it continues to be an index-tracking UIT until it reaches maturity,” Magoon says. “The maturity of the ACES UIT is likely to be longer term in nature—perhaps five to 25 years—as this portfolio is not static and will continue to tax efficiently track its index just like an index-based ETF.”
The first ACES product in registration with the Securities and Exchange Commission is the Amplify/ACEShares SB Global Tactical Index Trust. Elkhorn Securities LLC is the sponsor of this UIT product, which is based on an investment strategy from Silver Birch Capital Advisors in Indianapolis.
“We partnered with Elkhorn because they have an existing UIT business to launch the UIT under their sponsorship,” Magoon says, adding that Amplify expects to work with other UIT sponsors down the road. “We’re not a UIT sponsor; we simply created the intellectual property that enables the conversion of a UIT into an ETF."
This Silver Birch product is an index of ETFs based on an allocation strategy with two buckets within the index. It buys and sells other ETFs based on different signals in these two model portfolios.
Magoon expects this UIT to trade in April. “This new product will have a CUSIP and ticket symbol, and you’ll be able to see the portfolio on a daily basis,” he says.
The trigger to convert this product into an ETF requires at least $50 million of assets under management and a minimum time in the market of 12 months. Both of these conditions must be met before conversion. If and when that happens, the product would convert into an Amplify ETF trust.
Magoon says marrying UITs and ETFs isn't new, as two of the industry’s bellwether ETFs—the SPDR S&P 500 ETF (SPY) and the PowerShares QQQ (QQQ)—are structured as unit investment trusts.
Staying Power
One of the motivating factors behind the ACES structure is to make ETF creation more economical. The three main expense features of an ETF are startup costs, operational costs and seed capital.
“We believe the seed capital for an ACES product will be around $150,000 versus the standard $2,500,000 for a traditional ETF,” Magoon says. “Startup and operational costs for ACES should be around $65,000 versus over $300,000 to start and operate a traditional ETF in year one.”
Another aim of ACES is to reduce the number of ETFs that launch, fail to attract sufficient assets, and eventually die on the vine.
“People who want to launch ETFs know it’s relatively easy to do so, but it’s a lot harder to be successful,” says Magoon, adding that when ETFs start trading they tend to have lower trading volume and higher spreads, which can discourage buyers.
By lowering the costs associated with launching and operating an ETF, he posits, this incubator-type structure provides a greater time cushion for a product to prove itself.