| NEW YORK, April 24
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
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)