We continue to have conversations with investment managers who are interested in non-transparent/semi-transparent ETFs. These structures do not require disclosure of daily portfolio holdings and have similar holdings disclosures as mutual funds. The ability to shield daily disclosure of alpha-generating securities resonates with many active managers. Although non-transparent and semi-transparent structures have gained a lot of interest, I would say, for the most part, we are seeing more transparent active ETFs coming to market than semi-transparent and non-transparent options as many are waiting to see how these structures will work in the marketplace. We have enhanced our operating model and developed the necessary operational workflows to support the various ETF structures and are ready to share our experiences and work with our clients to launch whichever strategy they choose.
Within our service model, Ultimus provides fund accounting, basket services, financial reporting, legal administration, tax, compliance, fund officers, and distribution services. Our flexible service model allows clients optionality in choosing an auditor, custodian, and legal counsel. Our clients leverage our deep industry knowledge and strategic partnerships to make industry introductions to market makers, authorized participants, and listing exchanges. Our ability to connect into the ETF ecosystem with key players provides efficiency, straight-through processing, and aggregation and distribution of fund data to market participants.
Hortz: How can a fund administrator support and help implement innovation in ETFs?
Prendergast: As clients expand their product offerings and may be looking to get into other asset types, like bank loans, emerging markets, or increased use of derivatives, we guide our investment management clients in sharing industry best practices to make sure they understand what is going to make an ETF successful and how they can put new asset classes into an ETF structure that the market will understand and accept.
We have developed operational workflows that support new and innovative ETFs. Leveraging our proprietary ETF processing technology, uETF, we have the infrastructure needed to support the timely creation and dissemination of basket and portfolio holdings data that the market requires to trade ETFs in an efficient manner. We also have a team with deep institutional knowledge and decades of ETF experience that have helped various firms come to market with new ETF offerings. Since January 2021, Ultimus has assisted over sixteen advisors launch new products. We want our clients to leverage our ETF experts and utilize them as an extension of their product management team in developing new products that will be operationally efficient in the ETF ecosystem and well received in the marketplace.
Hortz: Where do you see the ETF market going from here?
Prendergast: We see and expect continued growth in ETFs, especially with record industry inflows this past year. In 2023, we expect that growth momentum to continue. Actively managed ETFs continue to pique the interest of the industry and make up the majority of new ETFs. We continue to see interest from new market entrants and asset conversions from other structures such as mutual funds and SMA accounts.
We also expect growth to continue with new product offerings ranging from equity, actively managed, fixed income, ESG, and more complex products looking for exposure to emerging markets, derivatives, and single stock ETFs. With significant investments in technology and people, we have created a scalable operating model and in-depth consulting capability that is well-positioned to service our clients’ business needs and anticipated industry growth.
Any advice or recommendations you can offer asset managers with ETFs or thinking about launching an ETF?
Prendergast: If starting out, begin with an investment strategy that has a strong track record and where you have a proven area of expertise. Know your target audience and have a plan of how you will gain/attract assets. Understand how you will market and sell your product through new distribution channels in advance.
Consider potential new hires that have ETF operations, sales, and distribution experience. Pick your service providers early in the process. They are an important part of any successful launch. Leverage their deep industry expertise, their ability to provide you with key industry introductions, share in industry best practices, and they can help keep you on track for a timely and efficient ETF launch.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We operate as a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, FLX Networks, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).