According to ETF.com, the number of exchange traded funds (ETFs) listed in the U.S. increased to 1,669 last year with 197 new products launched and a total AUM of over $2 trillion. Everyone’s favorite investment product is putting up some staggering numbers. It’s clear that there’s still a long way to go in this market with plenty of demand for more products, but it’s becoming an increasingly crowded playground.
With an average of over one new ETF launching every other day, it’s getting more and more difficult for new products to stand out amongst the herd. How are you going to make sure your fund gets noticed among the other 200 that will launch this year? What is the best approach to successfully launching an ETF? We turned to four industry experts and picked their brains for best practices and potential pitfalls when launching a new product. The following is the first part of a two-part Q&A roundtable with:
President of ETF Issuer Solutions Inc.
An industry veteran, Bill leads a firm that is an emerging white label issuer, working with aspiring entrants to the ETF industry to mobilize product launches.
SVP, Business Development at U.S. Bancorp Fund Services, LLC
Mike helps lead the charge for U.S. Bank’s ETF business, often serving as first point of contact for issuers looking to bring new product to market. His firm’s multiple series ETF trust provides a complete, full service solution for those with existing relief or looking to file for or “rent” relief to launch an ETF.
CEO of Exchange Traded Concepts
A founder of FaithShares, Garrett converted his business to a platform for other issues to launch ETFs back in 2011. One of the first “white label issuers” in the market, his firm now has in excess of $2 billion in assets on its platform.
Founder and CEO of YieldShares
Christian provides strategic counsel on product development, marketing and distribution to asset management companies involved in the exchange traded fund business. Christian is also CEO and Founder of YieldShares, an ETF Sponsor focused on income solutions. He currently serves as consultant and spokesman for the recently launched PureFunds ISE Cyber Security ETF (HACK).
What are the fundamental ingredients for a successful ETF/ETP launch?
First, an issuer must ensure that it has built a structurally sound product, both in the product’s wrapper (i.e. regulatory structure) and in terms of strategy optimization (i.e. index methodology appropriately matching the product’s investment thesis). Second, third, and fourth is a comprehensive plan of distribution that includes both short and long term goals. This will vary based on the product, the issuing firm, and the market environment, but addressing distribution is universally applicable. Of course, the definition of a “successful” launch, too, will vary. Nonetheless, the “Field of Dreams” approach to ETF origination has been dead for over five years and, without a well-defined and realistic plan to garner a viable level of assets under management (AUM), a new product with interesting investment merits could be DOA.
First and foremost, identifying pre-launch sources of AUM for your ETF is a vital consideration. There are two categories to consider. “Captive AUM” refers to current client assets (such as existing SMA or mutual fund assets) that you can legally, compliantly, and efficiently bring to the ETF as part of or shortly after launch. “Captured AUM” refers to assets gathered via traditional wholesaling and marketing activities. If you do not have captive AUM, a well thought out wholesale and marketing plan to capture AUM is essential. For example, identifying wire houses, regional platforms, and other RIAs who currently use your existing products and indicate strong interest in owning your ETF once launched, provides a target AUM level to help estimate first year revenues and expenses.
Second, the selection of an experienced service provider (for administration, accounting, transfer agent, custody and distribution) and other advisors and key resources (trustees, compliance staff, tax, legal, etc.) is an operational necessity. Joining an existing multiple series trust, using your own existing investment company or creating a new one are all readily available options.
Finally, deciding on filing for your own active and/or passive ETF relief or “renting relief” from an existing investment advisor is also a necessity.
You have to have a fully formed marketing plan. Not to be confused with some marketing “ideas” for launch. ETFs, unfortunately, have a very flat footed start because of rules prohibiting marketing while the firm is in the quiet period before launch. You have to have a real, step-by-step plan for how you are going to get the word out once the fund launches. You can have some “ideas” you want to try once you are able. You can speak with certain institutional investors during this time but cannot market broadly.
It’s best to have assets lined up to feed into the fund after launch. Because of the flat footed start, nobody knows you are there and contrary to your hopes and dreams there will not likely be a line of people with orders in hand waiting to buy your fund after the bell rings on the first day. Anytime you see a fund that has good volume in the first few days or weeks after launch, it is because investors with seed capital or initial institutional investors lined up prior to launch. Volume begets more volume in the ETF world. Volume is a sign that someone else likes the fund so it’s ok for another investor to like it as well. Nobody wants to be the only one buying a new fund and see only their volume on the tape. It makes them feel exposed and they will second guess their decision if nobody else is buying. It is vital to have at least a few million dollars lined up to show even a few thousand shares a day in volume.
Comprehensive planning is the key. Planning needs to be done by function and by the life stage of the ETF. In terms of function, areas like marketing, media, distribution and operations need plans. These plans need to distinguish between the ETFs three stages: pre-launch, the launch window, and post-launch. Taking a one dimensional planning approach – just doing planning in one area like marketing or in one stage like the launch window – elevates the risk that the new ETF will not reach success. It is important to note that post launch activity designed to reinforce or follow up on previous activity can significantly increase the effectiveness of launch efforts.
You can find me on Twitter @JoeAnthony.