NEW YORK, April 24While a handful of big players have long dominated the exchange-traded funds market, more smaller players are elbowing their way in, thanks to the growth of "white label" ETF companies that will build and launch ETFs for a modest fee and a share of the profits.
For less than $100,000 in startup costs, any aspiring fund manager with a bright idea can get a custom ETF brought to market in as few as three months. The white label firm will line up the regulatory approvals, provide a board of directors, and get the ETF listed and trading. The fund's inventor gets to name the fund and start profiting as assets grow.
With more than 30 ETFs launched since 2011, and at least two dozen more in the pipeline, companies like Exchange Traded Concepts in Edmond, Oklahoma, AdvisorShares in Bethesda, Maryland and ETF Issuer Solutions Inc in New York are breaking the barriers to entry that had protected big fund firms from small competitors. They have attracted hedge fund managers and serious investment hobbyists and foreign asset managers who have plan designs or want easy access to U.S. investors.
They may be a sign of the democratization of the investment world, or possibly of froth in the $2.4 trillion global ETF market, or both. But analysts expect them to continue growing.
"That really is the allure - that anybody with a good idea can make it happen," said Dave Nadig, chief investment officer of San Francisco-based research and analytics firm ETF.com.
PROFILE OF A LAUNCH
Typical is Santa Barbara, California-based Frank Tobe, who, after investing his own money in robotics stocks for more than a decade, decided early last year that he wanted his own ETF.
In June, after crafting an index from his database of publicly traded robotics companies, he signed a partnership deal with Exchange Traded Concepts, which set about building the fund for him.
Four months later Tobe watched as his Robo-Stox Global Robotics and Automation ETF began trading on the Nasdaq. His ETF now has more than $100 million in assets, six month after its launch.
Tobe credits Exchange Traded Concepts with saving him roughly 90 percent in startup costs and more than eight months of pre-launch bureaucracy. The fund-building companies typically charge between $20,000 and $100,000 for startup costs and then get a portion of the price that investors pay for the fund.
It can take $500,000 to $1.25 million for an individual to launch an ETF from scratch, according to longtime ETF industry veteran and now consultant Robert Tull, who has helped design and develop more than 300 exchange-traded products.
A GROWING CLIENT BASE
Of course, it takes more than shelf space at Nasdaq Or the NYSE Arca to make a successful ETF. The concept of the fund has to be solid - Exchange Traded Concepts gets about 10 to 20 pitches a week, but rejects about 60 to 70 percent of the ideas because of regulatory concerns or simply because the idea doesn't seem promising enough, Stevens says, adding that he turned down roughly a dozen Bitcoin fund proposals.
And the best ETF-building firms help their funds find investors by assisting with distribution relationships and marketing. One of the most successful white-label ETFs is the roughly $8.3 billion ALPS Alerian MLP (Master Limited Partnership) ETF, launched in 2010 by ALPS with Alerian, a Dallas, Texas-based firm that focuses on investing in MLPs and energy infrastructure markets. ALPS is among the oldest ETF-building providers along with AdvisorShares, which has partnered on some 25 funds over the past five years. But newer entrants like Exchange Traded Concepts, founded in 2011, and ETF Issuer Solutions Inc, whose first fund it services launched in December 2013, are adding critical mass to the space.
"The last few launches really are what have put...(white-label launched funds)... on the map," Nadig said, speaking of The Robo-Stox and Vident International Equity Fund , launched via Exchange Traded Concepts, which now has some $677 million in assets.
In the past few years, hedge fund managers seeking to launch ETFs based on their strategies, small money managers who want to build their businesses and foreign firms seeking access to U.S. investors have all turned to white label firms to help them bring their ideas to market.
Exchange Traded Concepts, for example, has partnered with Canadian ETF firm Horizons on two funds so far. The firm is also working with U.K.-based ETF firm Source and plans to launch a China A Shares ETF, according to regulatory filings.
"We've had a lot of interest from overseas (firms) wanting to come and talk to us," says Exchange Traded Concepts Chief Executive Officer Garrett Stevens. "The (U.S.) markets are very unfamiliar to them."
Matthew Brown, chief executive officer and co-founder of ETF Issuer Solutions Inc, said he also expects to see some larger, more established players turning to white label firms to "kick the tires" on new ideas without fully committing their own platform or resources.
"They might seek to issue one through a white label provider as a way to test the marketplace," Brown said, "without committing the full expense of building a team or building a trust or putting their brand on it." (Reporting by Ashley Lau in New York; editing by Linda Stern and Andrew Hay)