It’s never been easier to start an exchange-traded fund -- or so it seems.
Just ask the two wannabe asset managers who are planning new funds by themselves, away from the third-party ETF expert they previously relied upon to usher them through the arcane process. And they aren’t alone. With regulators set to remove red tape around getting funds to market, flying solo is now a viable possibility for even the smallest of issuers.
The simplification of bringing a fund to market presents one more challenge for so-called white-label firms, which make their money guiding industry newbies into the $3.6 trillion ETF marketplace.
White labels gained traction after the financial crisis as a means for start-ups to take on the mega money managers that dominate ETFs. But the legal battles surrounding one of these providers, ETF Managers Group, have cast a pall over the business in recent years. And now, with a rule on the way to streamline the way funds are approved -- a process known as “exemptive relief” -- expert issuers are changing up their business models.
“It’s really no longer about simply the speed of exemptive relief or saving some legal fees,” said Phil Bak, chief executive officer of Exponential ETFs, which sells its own funds and selectively acts as a white label. “What’s more impactful to potential firms is having that expertise in house, on their team, on day one.”
The Enablers
Many of the first white labels were born when their own funds shuttered. These companies, which had already secured regulatory approval to sell ETFs, discovered newcomers would happily pay a fee to use their exemptive relief. It gave them a new lease of life, and aspiring asset managers were able to bypass a wait of a year for their own approval while saving $1 million or more in legal fees.
No longer. Recent issuers estimate that gaining relief now costs as little as $15,000 in administrative and legal fees. And EquBot, a San Francisco-based firm, heard back from the SEC about its request to start an ETF in just five weeks. The company now plans to sell an ETF built using artificial intelligence.
“I don’t really think that the old school white-label market of ‘I can do it cheaper’ can survive,” said Mike Venuto, chief investment officer of Toroso Investments, an ETF consultant, asset allocator and index provider.