4 ETF experts share product launch best practices
By Joe Anthony
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:
BILL SMALLEY
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.
MIKE CASTINO
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.
GARRETT STEVENS
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.
CHRISTIAN MAGOON
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).
JOE:
WHAT ARE THE FUNDAMENTAL INGREDIENTS FOR A SUCCESSFUL ETF/ETP LAUNCH?
WILLIAM SMALLEY:
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.
MIKE CASTINO:
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.
GARRETT STEVENS:
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.
CHRISTIAN MAGOON:
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.
As the industry’s largest conference, ETF.com’s Inside ETFs gets into full swing today, the panel hits on some of the challenges that aspiring ETF issuers face.
JOE:
WHAT IS THE MOST OVERLOOKED ITEM THAT IS MOST OFTEN INVOLVED IN A SUCCESSFUL ETF LAUNCH?
GARRETT STEVENS:
I think the successful fund launches you see have a very easy story to tell. ROBO is a great example. The ticker and the fund name tell you everything you need to know about the fund. There are lots of great investment ideas out there that are trying to make it in the ETF world but they are so hard to describe and explain that they have a hard time getting traction. I think in many peoples zeal to get their ideas into the market place and to prove how much thought and research went into their products they have trouble keeping the message simple and easily digestible.
WILLIAM SMALLEY:
For new entrants, a deep understanding of the demand for a particular new ETF within the channels accessible to the issuer early in the process has been a deficiency from which new participants have suffered in recent years.
CHRISTIAN MAGOON:
One of the most overlooked items for an ETF launch is the turnaround times needed by various service providers. Just because an ETF is launched doesn’t mean that service providers can or will be able to expedite their normal turnaround times. Often, ETF sponsors who have just launched a product want everything done immediately, but that is seldom how it works. Proper planning ahead of time can identify and ease some burdens when it comes to this commonly overlooked item.
MIKE CASTINO:
The most overlooked item in a success ETF launch is identifying sources of AUM. Every ETF is launched under the premise of providing access to an innovative or compelling strategy. However, we have seen many ETFs with great track records close over the years; many times not for lack of performance but for lack of AUM growth. Without significant AUM in an ETF it may be a tough conversation to convince investors to be “first in” and product approval committees to approve the ETF for use on their platform.
JOE:
HAS THE CONTINUED LAUNCH OF NEW ETF/ETP PRODUCTS MADE IT EASIER OR HARDER FOR ISSUERS TO GAIN MARKETPLACE ACCEPTANCE OF THEIR PRODUCT?
MIKE CASTINO:
The continued launch of both passive and active ETFs has made acceptance of ETFs easier. Continued demand has fostered innovation and efficiency with issuers, service providers, and the SEC. Streamlined application processes and increased familiarity with product structures, securities utilized within portfolios, and management techniques have shortened the application/approval/launch process. This includes the 19b-4 application process exchanges must go through prior to listing certain products. Clarity in terms of what is “getting through” the process and what is not is essential intelligence.
Just as important is the continued advancement and efficiency in the ETF capital markets arena. Agency execution desks are providing crucial services in the areas of liquidity sourcing and best execution. Authorized Participants continue to streamline and provide creation/redemption efficiency. Lead market makers/designated liquidity providers and secondary liquidity providers continue to keep bid/ask spreads tighter and depth of book more robust. Product sponsors and institutional investors should always engage these capital markets players for their benefit and the benefit of their clients.
CHRISTIAN MAGOON:
Yes, it is harder than ever to launch a new ETF due to an increased amount of products and sponsors. For this reason, people and firms with a track record of successful ETF launches are crucial to align with. A successful ETF launch has the potential to result in an instantly profitable fund that will also generate significant brand awareness. Conversely, an unsuccessful ETF launch almost guarantees hundreds of thousands of dollars in future fund subsidy costs, elevates the risk of product closure and could diminish the sponsor’s reputation.
WILLIAM SMALLEY:
On the one hand, there are nearly 1,700 U.S. ETPs, so shelf space is perpetually growing tighter. On the other, ETF AUM continues to grow at an astonishing pace (especially relative to mutual fund growth). This dynamic is one of the reasons why we are bullish on active and alternative ETFs. As you know, most ETFs today have low cost Beta objectives. There remains tremendous opportunity in the marketplace for new and unique products, particularly in asset classes and strategies dominated by mutual funds and/or hedge funds. We firmly believe we are in the early innings of the ETF game, and we welcome the competition for market share. It’s never easy, but barriers are falling even as more asset managers enter the business.
GARRETT STEVENS:
I think it’s made it easier. People are used to seeing and hearing about ETFs. There is less explanation that has to go on about the vehicle itself before you even get to the funds strategy than there used to be. The popularity and the prevalence of the ETF wrapper is helping to inform people and give them comfort that ETFs are not esoteric, derivative type investments that they should stay away from.
Source: https://gregoryfca.com
