As the exchange traded fund industry grows, more money managers are jumping on the bandwagon and creating their own ETFs. However, some new entrants are neither large money managers nor mutual fund families. They’re small companies, or just guys with a dollar and a dream of running an ETF.
To help these people achieve their dream, a niche business called white-labeling ETF companies has emerged to build and launch funds for a fraction of what it typically costs.
Creating an ETF “from start to finish, for all the contracts, the average is between $750,000 and $1.25 million, and anything less than that is a gift,” said Bob Tull, an independent financial-product consultant, who has helped develop more than 300 ETFs of all kinds. “That’s the total for exemptive relief, the prospectus and all the contracts.”
But because they already have the infrastructure in place, white-label firms can help a small player bring an ETF to market for about $100,000.
White-labeling, most commonly seen on generic products in supermarkets, is where one company produces a product or service and lets another company put its brand name on it. Thus, the second company looks like it made the product.
The ETF industry consists mostly of huge money managers or mutual fund companies, which built the infrastructure to create and run investment vehicles. But many of these new ETF players have little, if any, of this infrastructure. Instead of spending the money to build it on their own, they’ve outsourced the job to ETF white-labelers.
White-labelers have brought more than 30 funds to the market, and many more are in the works.
“A lot of people don’t want to deal with the daily requirements of maintaining the ETF. That’s what we do for them,” said Sam Masucci, the chief executive officer of Exchange Traded Managers Group, a private-label issuer firm in Summit, N.J., known as ETFMG.
Using Exemptive Relief
More important, the small player gets to use the exemptive relief previously obtained by the white-label firm. In order for an ETF to trade on the stock market, it needs to break a few rules in the regulation that controls mutual funds, the Investment Company Act of 1940.
The ETF firm must apply to the Securities and Exchange Commission for permission to break the rules. This permission is called exemptive relief. Depending on the complexity of the fund, it can take upwards of two years to be awarded.
After a firm receives its exemptive relief for a category of funds, the process to create additional ETFs can take a little as three months.
This concern made PureFunds, an independent ETF research house based in Mendham, N.J., go with a white-label firm instead of filing on his own. PureFunds Chief Executive Officer Andrew Chanin said he had already seen ideas he wanted to launch get scooped up by other firms and hit the market.
“Our big fear was we would file for the fund and it would take too long to approve,” said Chanin. “Being a start-up, if someone beat us to the market, that would be enough to sink the company before we got out of the gate.”
ETFMG helped PureFunds launch the PureFunds ISE Junior Silver ETF (SILJ), which tracks small-cap silver-mining companies. ETFMG helped PureFunds develop and vet the idea and find an index maker to produce the index and methodology requirements.
It then helped write the prospectus and let PureFunds use its exemptive relief. During the time the SEC was reviewing the filing, ETFMG put in place all the third-party agreements with accountants, lawyers, authorized participants and the exchange it would launch on. Now, ETFMG manages the daily operations for the fund.
Meanwhile, PureFunds is responsible for marketing the fund and bringing in assets. Currently, the fund has just $5.6 million in assets under management. But that could soon change. Year to date, the fund is up 26%.
Originally published in Investor’s Business Daily.