Lowering Costs by Taking EDGAR filing duties in-house

Lowering Costs by Taking EDGAR filing duties in-house ColleaguesWe continue to build a platform that helps ETF sponsors win. In that spirit, I wanted to share some good news:We are saving you money by taking EDGAR filing duties in-house starting in January 2024. 1) We are taking EDGAR filings in-house and passing the savings on to you. EDGAR filing fees cost each fund up to ~$5k per year. When we file a document with the SEC, we have that document“EDGAR-ized” and filed. Currently, we pass these variable costs on to you. We made a $250k+/yr investment in personnel and technology that will lower your costs. Last month, we signedcontracts, hired new employees, and conducted extensive training so we could do all SEC filings in-house. If yourfund(s) made a small filing in August (a few pages), you may have already seen savings. 2) We are beta-testing now, but we project up to 50% in filing fee savings EDGAR filing firms charge a fixed fee, plus a “per page fee” plus a fee, per page, to make edits. For example, if you file a 3-page document, you could pay $100 fixed plus $7 a page for $121. If we caught two typos and changed a date, you arelooking at another $30, or $151 total. Effective immediately, you will pay up to 50% less on filing fees, and these payments will go directly to ETF Architect. Q4 will be a transition period while we wean ourselves off third-party providers. After that, we hope to be fullyindependent for most filings. We will maintain relationships with low-cost third-party providers for operational redundancyand to help facilitate esoteric filings or filing with extremely short deadlines. Our long-term goal is to lower your overall costs and make your ETF operate as efficiently as possible. Download PDF Related Posts Top 10 Ways to Screw up a Tax-free Conversion from an SMA to ETF January 14, 2025 We want to launch an ETF. Should I be the ETF Advisor or Sub-Advisor? December 26, 2024 Lowering Costs by Taking EDGAR filing duties in-house September 9, 2023 We are Lowering ETF White Label Costs and Investing Back into the Business May 16, 2023

We are Lowering ETF White Label Costs and Investing Back into the Business

We are Lowering ETF White Label Costs and Investing Back into the Business From Day 1, we have sought to build a platform that helps ETF sponsors win with a dedication to affordability, turnkey operations, and transparency. We are honored that you have chosen us as your ETF partner, and we would like to share some good news. 1) Despite large inflation increases, we have lowered your costs via our scale and dedication to efficiency. An “inflation” holiday via no inflation increases through 12/31/2024. Through service provider negotiations and efficiency improvements, we are confident we can internalize inflation risks for the foreseeable future (through 12/31/2024). If we continue to grow and lean on our counterparties via our scale, we are hopeful we can extend inflation holidays in the future. Custody minimums have been reduced by 40% per fund. Custody expense is passed through at cost, so lower costs directly benefit our partners. We have achieved a 40% reduction in custody minimums, meaning smaller funds will save thousands annually. Effective immediately, funds that achieve a three-year anniversary will receive a one-time $5k rebate. In the spirit of fostering long-term relationships, we are also rebating $5k back to our long-term platform partners at the end of the year. Thanks to your referrals, we spend virtually nothing on marketing, translating into lower platform costs. Referrals, reference checks, and helping us spread the word eliminate the need for sales and marketing, which allow us to keep costs down. 2) We are reinvesting profits from the business to improve efficiency and client service. We have invested over $1M run-rate in operations, compliance, and scalable technology, without cost increases, since 2021. Over the past 24 months, we have upgraded personnel, trading systems, compliance infrastructure, board reporting, and regulatory processes. We remain lean and focus on the Marine Corps mantra of “Do more with less.” We have passed on aggressive private equity investments; instead, we are investing in the team. Private equity capital provides short-term incentives that may not align with long-term efficiency and quality of service. We have onboarded fantastic team members with high integrity, capability, and passion, and we are incentivizing them with an “owner-operator” mindset via an equity plan. We believe this equity plan will ensure we maintain a long-term focus on efficiency and the quality of our services. 3) You are cordially invited to the ETF Architect Marine Corps Ball, on Nov 9. Before invading Iraq in March 2003, General Mattis’ letter to the 1st Marine Division enjoined his Marines to “Keep faith in your comrades on your left and right…[and] fight with a happy heart and strong spirit.” Thank you for being our comrades and helping us fight with happy hearts. In the spirit of camaraderie, we are hosting the first-ever ETF Architect Marine Corps Birthday Ball on November 9, 2023. Please save the date (invitation to follow). Download PDF Related Posts Top 10 Ways to Screw up a Tax-free Conversion from an SMA to ETF January 14, 2025 We want to launch an ETF. Should I be the ETF Advisor or Sub-Advisor? December 26, 2024 Lowering Costs by Taking EDGAR filing duties in-house September 9, 2023 We are Lowering ETF White Label Costs and Investing Back into the Business May 16, 2023

Mutual Fund to ETF Conversions: To Proxy or Not to Proxy, that is the question

Mutual Fund to ETF Conversions: To Proxy or Not to Proxy, that is the question ETF conversions are accelerating, and we are seeing more and more mutual funds converting into ETFs. The reasons for a mutual fund to ETF conversion are obvious: tax efficiency, transparency, and lower operating costs.But how does this work? What are the pros/cons? This post provides a glimpse behind the curtain and a practical guide for any asset manager considering a mutual fund conversion. Below we outline the laws behind a mutual fund conversion, options for mutual fund conversions, and the nitty-gritty behind how to optimize a mutual fund conversion.Before we get started, here is a shameless plug: if you want to convert your mutual fund into an ETF, you can use our trust, convert on your current trust, or contact us for consulting support. We’ve also written a ton of blogs on how to launch ETFs, which serve as an FAQ on ETF operations.Finally, maybe you aren’t an ETF sponsor but simply a mutual fund shareholder subject to an ETF conversion. This post will shed some light on the process and provide a step-by-step guide to understanding what would happen to your mutual fund shares. Why do an ETF conversion? In our view, ETFs are a no-brainer (for most strategies). It’s like comparing a horse and buggy to the Model T. Sure, a horse and buggy may have some redeeming qualities, but the future is with Ford. Same with ETFs.Below are the key reasons to convert a mutual fund. Tax efficiency – If your money is taxable, this is a no-brainer. Operational efficiency – For an operator, ETFs can potentially be less capital-intensive and operationally easier to manage. Daily inflows do not have to be continually traded and monitored. Tax loss harvesting is removed via the in-kind redemption process. In short, you will soon find yourself with a lot of mutual fund management horsepower that can be repositioned into other roles. Lower cash drag – less cash to manage, less cash to drag. Broader interest/model portfolios. We talk to RIAs daily, and we have never encountered an adviser interested in a model portfolio of mutual funds. Similarly, no one calls our office asking for a comparison of X ETF fund to Y mutual fund. It just isn’t happening. The market appetite for ETFs is here; the market appetite for mutual funds is mostly gone. Laws behind a mutual fund conversion There are two paths for mutual fund to ETF conversions: direct conversion and reorganizations. A direct conversion occurs when a mutual fund converts into an ETF and remains in its existing trust. A reorganization occurs when a mutual fund is proxied to a new Trust (typically one specializing in ETFs), and shareholder approval is required.Regardless of the path you choose – mutual fund conversions involve pain. Reorganizations deliver pain upfront; direct conversions deliver pain after the fact. But rest assured, either approach will require some elbow grease. For the examples below, I assume that you are comfortable with the “transparent” ETF approach. If you need semi-transparent ETFs, add the Exemptive Relief process to either of these paths. Direct conversions – Deceptively Simple The Direct Conversion method is simple but involves a material commitment to building internal ETF operations accordingly.In a direct conversion, the Fund prospectus is changed, the organization docs of the Trust are evaluated, and if lucky, you can “convert” your mutual fund within its current trust (See Rule 17a-8 of the Investment Company Act of 1940). Easy right?In a direct ETF conversion, managers are spared a proxy (unless their Trust docs mandate one), and more importantly, they are spared from having to reach out to clients. Many may not be aware of the mutual fund or, more importantly, the fees associated with such a holding. “I own what? How much am I paying?”. Some managers prefer to let sleeping dogs lie. Let him sleepBut with direct conversions come direct responsibilities. The minute your Trust hosts an ETF, it is subject to a myriad of rules, regulations, and nuance that mutual funds are not a party to. More importantly, Independent Board members are expected to have oversight of these matters and documentation thereof. If a mutual fund board has grown accustomed to the “good life” under mutual funds, ETF oversight is a jolt to the system. Similarly, the Fund Adviser will be responsible for monitoring and implementing trading, compliance, vendor oversight, etc., etc. You are effectively launching a new asset management firm within an existing firm.Granted, this is all certainly possible. Just be sure to have a good operations plan and lay the groundwork upfront…way up front.Finally, you ask incumbent service providers to perform new, augmented services. This will also require diligence, mutual agreement to contract terms, board approval, etc. Reorganizations – Proxy required, but heavy lifting outsourced A reorganization is technically a “fund merger.” A shell fund is created on a new Trust (often with very similar characteristics – fund name, strategy, portfolio manager, etc.). The standalone fund is reviewed and approved by the Fund’s board and the SEC (much like a traditional ETF). In parallel, a Form N-14 is prepared, which outlines to the SEC, “Here is how the merger will work, and here are the key similarities and differences between the old and new fund.”A skilled attorney will ensure both the Shell Fund and the Form N-14 are palatable to the SEC (hint: identical fund strategies and lower fees on the ETF side help). Once the SEC and board bless all docs (Fund Reorganization, New Fund Prospectus), the filings are made. Shareholder materials are printed, and the proxy process begins.I’ve never done a proxy before…how does that even work?Proxy efforts can be highly complex efforts or relatively straightforward. It all boils down to shareholder concentration. To win a proxy, 50% of shares outstanding must vote, and 2/3 of them must vote in the affirmative. The hardest part is simply getting people to vote (regardless of preference).The first step is running a shareholder analysis via the Transfer Agent. That

Why Advisors (and Family Offices) Should Consider Creating their Own ETFs

Why Advisors (and Family Offices) Should Consider Creating their Own ETFs We believe that the primary benefits of the ETF wrapper (tax efficiency, easy access, and transparency) should be available to a broader set of professional investors and not just the Wall Street behemoths. Our firm mission is aligned with this vision as we seek to lower the barriers of entry to the ETF market. The good news is that we have been working hard to lower the cost of establishing and operating ETFs, thus making the ETF wrapper more accessible to a broader audience of potential users. This piece highlights how non-traditional ETF sponsors, such as registered investment advisors (“RIAs”), family offices, and boutique asset managers, can leverage the ETF wrapper to potentially benefit their clients.Of course, the biggest challenge non-traditional ETF sponsors face is transitioning their asset base (e.g., managed accounts, LP, or mutual fund) into the ETF structure in a tax-efficient manner. To solve this problem, we have specialized in facilitating tax-free conversions from SMAs, LPs, and mutual funds into ETFs (often referred to as “351 transactions”). You can dig into the weeds of how this works via this post. But here is the bottom line: low-basis assets can be transitioned into the ETF wrapper, tax-free. I’m an RIA or Family Office. Why Should I Consider Creating or Converting into an ETF? Let us be clear upfront. Starting an ETF will never be cheap and/or easy (explained below). And in most situations, the complexity and costs will not be realistic for many advisors. However, that does not mean investors should never consider unique solutions to problems. In the end, good advisors — from advisors managing bespoke stock strategies via separately managed accounts (“SMAs”) to financial-planning-focused advisors with simple investments — should have one overarching goal: to help their clients win. Conveniently, the ETF allows one to potentially deliver low-cost, transparent, and tax-efficient investment advice, often leading to better client outcomes.Here are a set of solutions the ETF can solve for asset owners: Common problem: Advisor fees are not tax-deductible The current tax code does not allow the deductibility of financial advisory fees, which means that a 1% fee is a pre-tax expense to the client. E.g., $10,000 is paid on $1mm SMA is $10,000 out the door. (see Kitces piece). ETF solution: Fees are tax-deductible Management fees in an ETF can be netted against dividends, interest, and income, implicitly making them tax-deductible. The deduction’s value will range depending on the situation, but at a minimum, the after-tax fee for HNW clients will likely be 25%-30%+ cheaper than an SMA equivalent. E.g., $10,000 might only be $7,000 on an after-tax basis, or a 30% cheaper after-tax fee than the SMA equivalent after-tax fee., $10,000 (1-t) on a $1mm, where t = the blended tax rate on the dividends, interest, and income received in the ETF wrapper. Common problem: Operational complexity Some advisors recommend holding several Vanguard funds that rebalance maybe once a decade. Not a lot of complexity in this situation. But for many other advisors, managing client portfolios is an ever-growing complexity. There are software solutions (often expensive) that can minimize these problems, but the devil is always in the details. ETF solution: Simplify SMA operations Operational complexity tied to ticker management and rebalancing is outsourced to the ETF operator. The RIA needs to buy/sell a ticker symbol to access its investment approach versus managing buys/sells across many ETFs and/or stock tickers. ETF operators also liberate resources previously consumed by back-office paperwork. While launching an ETF is expensive, so is managing payroll for traders, client relationship specialists, etc. Common problem: Tax optimization is challenging Related to the above, managing taxes across multiple accounts with varying basis situations is exceedingly complex. RIAs have leaned on outsourcing this problem to direct/custom indexing software solutions. Still, many advisors quickly realize that the benefits of direct-indexing programs are short-lived when the tax shields evaporate (or aren’t useful), and the client is stuck with an expensive, highly complex index fund with no flexibility. Yuck. ETF solution: Leverage the ETF structure to minimize taxable distributions ETFs have been referred to as a great “tax swindle.” While we think this language is inflammatory, we agree that ETFs have unique tax advantages that benefit the broad investing public. In short, ETFs can achieve substantial deferral benefits, even in the face of substantial turnover in the underlying strategy. Common problem: Brand building and business development Building a brand is challenging since advisors are ubiquitous in the landscape, and differentiation is challenging. ETF solution: Enter the broader marketplace and become part of the conversation Launching an ETF is akin to having a public IPO. The financial ETF media and ecosystem (e.g., Morningstar, FactSet, and Bloomberg) will integrate you into their daily flow, and you will more easily establish awareness for your brand and credibility. Common problem: Competitive threats Vanguard (Schwab and Fidelity are other examples) is not shy about threatening to take out advisors and lower the cost of advice to the marketplace via PAS (Listen to Tim Buckley). Advisors should take note of this threat. Especially those advisors who buy a handful of index-based ETFs and then charge the client 1% for their investment advice and planning services. Advisors must provide a unique value proposition and lower their cost structure to survive the next decade. ETF solution: Vertical integration Advisors can create an ETF, which allows them to vertically integrate into the asset management aspect of the business and compete with monopolistic competitors. Sounds Great…But what are the Downsides of Launching an ETF? At the outset, we stated that while we are trying to lower barriers to entry on the ETF wrapper, we can’t make it super cheap/easy (at least not for the foreseeable future). The reality is that launching an ETF will probably always be an expensive operation because of the complex web of rules and regulations.Below we discuss some downsides of launching an ETF (with a particular emphasis on launching an ETF via a 351 tax-free conversion): ETF startup and ongoing

Can You Keep Your Track Record After an ETF Conversion?

Can You Keep Your Track Record After an ETF Conversion? We get a lot of questions related to whether or not you can keep your official track record when you do a tax-free ETF conversion. The short answer is yes, you can keep your official track record, but it can be complicated.The situations where maintaining your track record is straightforward: Mutual fund conversions Because mutual funds are already “40-Act” funds their performance reporting standards are similar to ETFs and therefore it is easy to port the track record over to an ETF. Hedge fund conversions More complex, but possible. The primary requirement is the the old track record’s calculation standards meet 40-Act requirements. Here is a no action letter that walks through the details.(1) A single managed account More complex, but possible. This is identical to a hedge fund reorganization. An important disclaimer: the above talks about the legal ability to port a track record…but then you have the reality! Some other considerations: Some data providers have legacy systems and/or scrape data from public websites, which may mean that pre-ETF performance won’t be integrated into the software/website. FINRA still struggles with prior track records because they don’t fit neatly into their box. One needs to ensure that the track record gets into the PRIMARY performance section of the Pro / SAI.(2) The situations where maintaining your track record is technically not possible: Multiple managed accounts Even if the track record is GIPS certified, you cannot use this as your official track record. You can discuss the prior performance in your prospectus, however. The best case is as a supplemental in the back of your ETF’s Pro or SAI. Will have to show “new” and “old” side by side and under select circumstances. Similar accounts (i.e., you start up a fresh ETF that runs a very similar strategy to your managed accounts, HF, or MF.) The track record of the legacy accounts cannot be used as the official track record of the ETF. The track record of legacy accounts can be discussed with potential clients under certain circumstances (speak to legal for details). Other considerations related to keeping your official track record Here is the bottom line: converting into the ETF structure can bring a lot of benefits to the table, but porting your official track record over to an ETF can be challenging.However, even if the facts and circumstances of your situation suggest that porting your official track record into an ETF is impossible, all is not lost. Retail consumers, institutional investors, platform providers, gate-keepers, and so forth, will likely be aware of your previous performance and reputation as an asset manager/advisor and they can often read between the lines. For example, if an advisor has been running the “ACME US Dividend Strategy” for 20 years, and this same advisor launches the “ACME US Dividend ETF” with the same investment process and investment objective, it doesn’t take a rocket surgeon (or a brain scientist) to figure out that the ETF is probably a more tax-efficient version of the old strategy.Hit up our ETF Architect website and/or reach out if you have any more questions: References Please note that a hedge fund needs to be 40-Act compliant the entire time. Super illiquid stocks and 5x levered Zimbabwe credit swaps can’t be in the portfolio and will invalidate the ability to port performance. Also, the performance needs audited financials from a PCAOB firm. If the tracks are not in the main table, it will be tough to get FINRA approval for standard marketing approval. This also means you really need a multi-year track record to ensure you fit the standardized, full calendar year track record (e.g., 9 months in 2018 and 9 months in 2019 is no good. Best to have FULL CALENDAR year tracks to minimize issues). Please note that a hedge fund needs to be 40-Act compliant the entire time. Super illiquid stocks and 5x levered Zimbabwe credit swaps can’t be in the portfolio and will invalidate the ability to port performance. Also, the performance needs audited financials from a PCAOB firm. If the tracks are not in the main table, it will be tough to get FINRA approval for standard marketing approval. This also means you really need a multi-year track record to ensure you fit the standardized, full calendar year track record (e.g., 9 months in 2018 and 9 months in 2019 is no good. Best to have FULL CALENDAR year tracks to minimize issues). Related Posts Top 10 Ways to Screw up a Tax-free Conversion from an SMA to ETF January 14, 2025 We want to launch an ETF. Should I be the ETF Advisor or Sub-Advisor? December 26, 2024 Lowering Costs by Taking EDGAR filing duties in-house September 9, 2023 We are Lowering ETF White Label Costs and Investing Back into the Business May 16, 2023

Important Insights Into Index Versus Active ETF Management

Important Insights Into Index Versus Active ETF Management We have received quite a few questions related to the costs and benefits an ETF sponsor faces when managing their funds as a “passive/index fund” versus an “active fund.” Several weeks ago we talk about some of the regulatory & legal nuance tied to Index and Active ETFs and we recommend you read that article for a deep dive.Please note that the comments in this blog speak to the issue from the perspective of an ETF issuer, not necessarily an ETF consumer. Determining how the different structures might affect investment outcomes is nuanced and beyond the scope of this educational blog post. What are the key costs and benefits of active versus index ETFs? Index ETFs might be good for an ETF sponsor because of the following: Increased transparency Ability to show backtested performance under certain guidelines Easier due diligence and quicker onboarding times on to large wirehouse platforms Active ETFs might be better because of the following: Potentially lower costs because an index calculation agent is not required. Potentially lower costs because data licensing fees are no longer required. Potentially lower costs because compliance burdens tied to managing index compliance are lower. Strategy flexibility Less intellectual property flight In summary, there are no right answers when it comes to launching an active or an index ETF. However, the trade-off can be boiled down to the following: Index ETFs come with increased transparency and marketability; Active ETFs come with lower operational costs and increased portfolio management flexibility.Important side note: The tax efficiency of Index versus Active ETFs, while similar now, were different in the past. In the past, Index-based funds had a potential tax advantage over Active ETFs. This differential tax treatment is no longer a factor and the majority of active/index funds enjoy the same tax benefits regardless of the regulatory structure. Appendix: Basic background ETF sponsors, until recently, had to file an exemptive application to the SEC. Why? In order to operate an ETF, a fund sponsor needs to do things that are not allowed based on the Investment Company Act of 1940, so they seek relief from these regulations from the SEC.There are two primary types of relief: Index relief — granted to those fund sponsors that systematically follow a process, or index. Active relief — granted to those fund sponsors that can choose to follow an index and/or invest based on their discretion. In this piece, we will focus on the lawyer’s understanding of active and passive, not the financial definitions. Sorry finance geeks! What is an Active ETF? An Active ETF is an ETF structure that offers the portfolio manager a lot of flexibility to achieve their investment objective and the “secret sauce” of their process does not need to be revealed to the world. Active ETF examples could be 100% discretionary stock pickers or 100% automated algorithms. The key difference between Active ETFs and Index ETFs is that these ETFs can change/adapt on the fly and are not beholden to the hard and fast rules of an Index ETF. What is an Index ETF? An Index ETF, unlike an Active ETF, seeks to track an underlying index. And the Index MUST BE 100% mechanical. So all rebalances, all algorithms — everything — must be spelled out ahead of time. There cannot be a discretionary aspect to the process and making changes to the Index cannot be made on a frequent basis. Moreover, the details of the process need to be disclosed.Related Posts Top 10 Ways to Screw up a Tax-free Conversion from an SMA to ETF January 14, 2025 We want to launch an ETF. Should I be the ETF Advisor or Sub-Advisor? December 26, 2024 Lowering Costs by Taking EDGAR filing duties in-house September 9, 2023 We are Lowering ETF White Label Costs and Investing Back into the Business May 16, 2023

Should I launch an Active ETF or Index ETF?

Should I launch an Active ETF or Index ETF? Should you launch an Active or Index ETF? This post dives into some of the regulatory & legal nuances involved.If you are a consumer of ETFs or an intermediary that uses ETFs in client portfolios, understanding the differences between the index and active ETF regulatory regimes is extremely important because it will provide context for decision-making.Also, as a disclaimer upfront, we are not lawyers. We are educators. This post is based on our best understanding of how the regulatory systems work via our experience launching numerous ETFs and our experience of being in the wealth/asset management business for over a decade. We will try to use simple language to facilitate communication and understanding. If you really want to get into the technical details you would need to hire an expensive 40-Act attorney who actually knows what they are talking about.This piece is part of our continuing education series on ETF operations and logistics. You can find a recap and collection of the series here:https://etfarchitect.com/how-to-start-an-etf-resources-and-faq/Let’s dive into some of the details of active and passive ETFs. BOOORING…I already know the difference between Active and Passive Are you sure?Unfortunately, the definition of active and passive differ depending on your audience. Finance folks think about this differently than lawyer folks. For a deep dive into the differences, click here.Below is a quick summary of the differences in understanding: 1) Finance geek understanding For anybody who has ever studied finance, the definitions for active and passive are well-established (a shortened version of Bill Sharpe’s definition from the Arithmetic of Active Management is below): Passive = Value-weighted index of all assets in a given market (e.g., the US stock market, often proxied by the S&P 500, or even more accurately proxied via the Wilshire 5000). Active = Not passive. On one extreme, an active portfolio might hold a single position in stock ABC. On the other extreme, an active fund might hold 490 out of ~500 stocks from the S&P 500. Both portfolios are active to varying degrees 4, but one thing is clear: they aren’t passive. Alpha Architect believes active can be useful if investors are sustainable. 2) Lawyer understanding First, some background: ETF sponsors, until recently, had to file an exemptive application to the SEC. Why? In order to operate an ETF, a fund sponsor needs to do things that are not allowed based on the Investment Company Act of 1940, so they seek relief from these regulations from the SEC.There are two primary types of relief: Index relief — granted to those fund sponsors that systematically follow a process or index. Active relief — granted to those fund sponsors that can choose to follow an index and/or invest based on their discretion. Throughout the rest of this piece, we will focus on the lawyer’s understanding of active and passive, not the financial definitions. Sorry finance geeks! I’m launching an Active ETF. What are my regulatory obligations? Pretty simple: you need to be an SEC-registered Investment Advisor to manage an Active ETF. This applies even if you manage less than $100mm in assets. What is an Active ETF? An Active ETF is an ETF structure that offers the portfolio manager a lot of flexibility to achieve their investment objective and the “secret sauce” of their process does not need to be revealed to the world. Active ETF examples could be 100% discretionary stock pickers or 100% automated algorithms. The key difference between Active ETFs and Index ETFs is that these ETFs can change/adapt on the fly and are not beholden to the hard and fast rules of an Index ETF.That said, Active ETFs still need to follow the process disclosed in their Prospectus. This is why you will see very vague “Principal Investment Strategy” descriptions in an actively managed ETF prospectus. In fact, the active manager is effectively in a tug of war with regulators (or more likely, their own attorneys). The SEC will want ample detail to inform a retail investor as to what the fund actually does, while the fund manager will want to keep the details as high-level as possible to avoid tipping their hand or disclosing their process. An active manager also wants maximum flexibility, and thus, more general verbiage. What strategies work well in an Active ETF? If you have a strategy that can benefit from flexible rebalance rules and/or elements of manager discretion, an Active ETF is the way to go. Also, if a manager is concerned about the intellectual property tied to their investment process, an active ETF will afford the manager an extra layer of IP protection (although one still needs to reveal their holdings every day!)More importantly, the marketplace is slowly becoming more educated as to the nuance between active and passive. Active funds can follow very disciplined processes, akin to an index fund. Conversely, index funds can be very technical and complex, and appear to be almost active in nature. What are the regulatory requirements to set up an Active ETF? The most cost-efficient and expeditionary route for Active ETF sponsors is to get set up with a white label platform as an SEC-registered sub-adviser or co-adviser. The process checklist is as follows: Set up an entity (e.g., an LLC) Register the entity as an Investment Advisor (IA) with the SEC (SEC registration is required as an advisor to a 40-Act product). Set up an individual as the Registered Investment Advisor (RIA) under your IA. Build out and maintain a compliance program to manage conflicts of interest, marketing, and portfolio management oversight. Launch an ETF. Send trading signals to the ETF portfolio management team for execution (this can either be done via an in-house trading and execution team or an outsourced third party). We do this on a frequent basis and the costs and brain damage are not torturous. For a simple highly focused compliance program, you are looking at 5-10k in start-up costs and probably 5-10k in ongoing costs for ongoing compliance program management. (cost estimates can vary wildly depending on complexity!). The key drivers of

How to Start an ETF? Resources and FAQ

How to Start an ETF? Resources and FAQ We are on a mission to lower barriers to entry in the ETF market by delivering an affordable, easy-to-use, and transparent solution. Via our EA Series Trust, we partner with fund managers (hedge, mutual, SMA), registered investment advisors (RIAs), and family offices who want to leverage the material tax and operational efficiencies of the ETF structure.As an ETF white-label platform, we get the following question at least 1x a day: “How do I start an ETF?”Well, there is good news, and there is bad news: Good news: we can help you access the ETF market with an affordable, turnkey, and transparent ETF white label offering that spans the complexity spectrum from standard ETF launches to highly complex tax-free conversion transactions. Bad news: launching an ETF is an inherently challenging task with many moving parts. We have built a library of materials and educational links to help you become a more informed ETF white-label consumer. ETF White Label Educational Materials Our Firm: Current Clients Overview Deck Our Focus: tax-free SMA/HF/MF conversions into the ETF structure: Introduction to ETF taxation and 351 conversions. The case for converting managed accounts into an ETF vis section 351. It’s possible. Can you convert your managed accounts, hedge funds, or mutual funds into ETFs? Yes. Should Advisors/Family Offices Consider Launching Their Own ETFs? Yes. ETF operations 101: Can a white-label provider steal your ETF? No. Should I launch an Active ETF or an Index ETF? It depends. Can you keep your track record after an ETF conversion? It depends. How does ETF liquidity work? It’s complicated. Why are ETFs more tax-efficient? And why it sometimes isn’t. What does the ETF start-up process look like? Simple, but not easy. An ETF regulatory issue explanation: Stacy Fuller et al. went all out! ETF Architect Blog Podcasts on ETF operations: #258 episode on why to start an ETF Meb Faber, Wes Gray, and Pat Cleary dive into ETF mechanics and inside baseball #347 episode on how to start an ETF Meb Faber, Wes Gray, and Pat Cleary dive into how to create an ETF Frequently Asked Questions regarding ETF start-up How does a white-label platform work? An ETF White Label Platform enables an ETF Sponsor to launch an ETF without incurring the high cost of building and running a Trust. ETF Architect runs all aspects of running an ETF and enables its clients to focus on distribution and running their strategy.The high-level services provided by ETF white labels can be broken into three core components: Legal/Regulatory/Compliance Portfolio Management Marketing/Distribution ETF Architect offers #1/#2. Bank platforms offer #1. And several other white labels offer #1, #2, and #3 in one package. Do I need to trade the ETF and run custom baskets? Who trades my ETF? We bring a best-in-class trading and execution team as part of our service offering. There is no incremental need to hire trading personnel or outsource trading to a third party. Most importantly, ETF Architect prides itself in high-quality trading operations, ensuring your shareholders are afforded a fiduciary level of care in the execution of its duties. Does your firm help me with distribution? I have a great idea but need help selling. Distribution is a huge component of the ETF business. More importantly, distribution requires a highly customized, bespoke approach (at least for boutique operators). What may be the viable path for one fund is NOT a viable path for another. We prefer to provide bespoke 1:1 consulting on distribution, as required, and we will leverage our network on your behalf. Distribution expenses can get costly and fast. As such, we will not provide canned distribution services or packages upfront but rather will work with you to assess where your strengths and weaknesses are, what stage of ETF growth you anticipate being in, and how a comprehensive distribution strategy can leverage those points. Am I an Adviser on the Trust? A Sub-Adviser? Both options are available, but being a sub-advisor entails lower costs and complications. Do I need to be regulated? In general, yes. One can operate an index ETF and avoid registration under the publisher’s exemption, however, we strongly recommend that all ETF sponsors register with the SEC, regardless of whether or not they seek to operate an index-based fund or an active fund. How is billing handled? Do I enter into a lot of service agreements? ETF Architect provides a single, clean invoice on one page. We include all accounting, billing, and invoice payments as part of our low, fixed fee. You enter into a single contract with ETF Architect, and we deal with invoice management and billing on your behalf. Do I get to choose my listing exchange? Yes. ETF Architect works with all three listing exchanges (NYSE, NASDAQ, CBOE) What other costs are there that I should know about? All fund sponsors will need EO/DO insurance and must cover certain variable costs. We seek to keep these costs as low as possible and bill them pass-through (i.e., no markup). What types of funds can your platform handle? Our platform can support any fund type with the appropriate partner. Each strategy type is evaluated on a standalone basis (e.g., equities, fixed income, futures, etc.). What are your screening criteria? We do not seek to be the largest platform or the platform with the most funds. We grow slowly and selectively, partnering with high-integrity firms with a demonstrable chance of success. At a minimum, we expect partners to possess $500k in operating capital, $5M of launch capital for the ETF on Day 1, and a reasonable roadmap to $50M in fund AUM. What is your pricing? Pricing is developed on a case-by-case basis. For a generic ETF offering, one can expect startup costs to range from $50k to $75k and ongoing all-in costs to range from $200k to $250k+ per year. Plus, additional marginal costs vary from 5bps to 15bps depending on the scale of the fund. What do I need to do to launch an ETF? We launch a new ETF via three key workstreams:

Can ETF white label platforms “steal” your ETF?

Can ETF white label platforms “steal” your ETF? In this piece, we walk through the common comment that ETF white label operations can “steal” your ETF. And while this is a valid concern, and nefarious operators have engaged in these activities in the past, we have setup our operations in such a way that the possibility of us “stealing” your ETF is essentially impossible. In addition, there are corporate governance structures that are required under the 40-Act, that ensure all parties involved in ETF business dealings operate in a professional manner. Let’s begin with the biggest ETF robbery: The HACK ETF Saga Potential fund sponsors sometimes think that an ETF white label platform can “steal an ETF.” In this case, stealing means a fund Sponsor hires a white label platform, launches a successful ETF, then gets “fired” as the Adviser and replaced with someone else (with all fund profits being channeled to that new sponsor/adviser). With this assumption, we have seen several folks assume they need to take on the personnel to build a Trust themselves (along with hiring more staff). It gets expensive…real quick.The mythology behind, “it’s easy to steal an ETF” is driven by the “HACK story.” Walk with me…The infamous HACK scenario involved a white-label platform (ETF Managers Group, “ETFMG”). ETFMG was being used for “stealing” an ETF by Nasdaq (and Andrew Chanin at PureShares). ETFMG believed Nasdaq/PureShares were in material breach of their obligations to HACK. Nasdaq/PureShares felt like ETFMG was simply trying to steal their hard-earned profits from building the fund in the first place. Turns out a judge agreed with Nasdaq/PureShares and ordered ETFMG to pay $78mm+. Yikes! (see here for the gory details). Kids, this legal memo is what we call in the biz “getting taken to the woodshed.”What’s the lesson learned from the HACK case?Well, it turns out that you shouldn’t steal. Or more importantly, you shouldn’t even be perceived as stealing in the eyes of a courtroom. In this case, the judge viewed the rights of the Sponsor to be so sacrosanct as to award almost $80M in damages to the plaintiffs.Using the power of the 40Act (representing shareholders, acting as a fiduciary) can not be used as a blunt instrument to bully commercial partners (e.g., fund Sponsors). Seizing funds, assets, management fees, whatever is verboten. And thus, the first commandment of white-label platforms was chiseled in stone for all to see:Thou shalt not use the 40-Act to mess with Sponsors.OK, great. But who is going to battle someone for years and incur that expense? The possibility is still there, right? Never fear my white label friends, there’s ample protection for the little guy and gal too. Six reasons why an ETF white-label platform can’t steal your ETF This goes without saying, but integrity is everything in business and in life — this is especially true for those of us who have been in the Service. If you don’t have integrity, you really don’t have anything.But let’s pretend for a moment that an ETF White-Label operation lacked integrity and was actively trying to screw one of their platform operators.How plausible is it that this nefarious operation will succeed?Let’s walk through some high-level details on why that is challenging. Hopefully, this will better illuminate how ETFs are operated and managed. (1) Boards have to represent shareholders, only. The 40 Act, which governs investment funds, prohibits compelling a Board to do anything, contractually. (All mutual funds and ETF are required to have a Board with independent Trustees to make sure the fox doesn’t get in the hen house). The Board’s obligation is to shareholders and shareholders alone. Even if a business group forms its own trust (i.e., ETF Architect), this fact remains. The Trust must consider its obligations to shareholders ONLY. The Board does not work for the business owner, they work for the shareholders. Failure to do that = lawsuitville. To me, this is one of the most critical misunderstandings of ETF Trust and Platforms generally. ALL boards are only beholden to shareholders, and any GOOD board member knows that. Even if you form your own trust, and serve as an Adviser vs. Sub-Adviser, whatever, the independent Board of Trustees has a fiduciary obligation to shareholders only. We, the white label “conductor”, can get kicked off the train just as easily as one of the passengers. The Platform Agreement vaccinates a Fund Sponsor from HACK-like illnesses. A commercial platform agreement, which governs the relationship between ETF white-label platforms and potential ETF sponsors, is a binding legal contract whereby a fund sponsor gets the rights to residual profits after certain expenses are paid. This agreement protects the enterprise value of the fund Sponsor, because the agreement outlines economic obligations on behalf of the ETF white-label platform (e.g., pay me if X bills are paid in full, etc). This document is the key vaccine against the HACK virus. Change of control, assignment, the expectation to act in good faith, licensing marks, etc., are all key clauses to look at. The adviser agreement + Platform agreement clearly lay out the ecosystem. The key to ensuring there is a balance between the ETF white-label firm and the ETF sponsor? Analyze contracts together. Sponsors are typically an Adviser or Sub Advisor on the ETF Trust (which is overseen by the Board…discussed above). Two roles, one entity: The 40 Act gives power to shareholders via the Board; the commercial agreement gives power to the Sponsor. Note: you can be an Adviser or Sub-Advisor on a Trust, but we recommend serving as a sub-advisor to maximize efficiency. Contact us for details. White Label “Advisers” or Trust Officers are bound to a fiduciary standard with shareholders. The white label firm (e.g., ETF Architect), serves as the Legal Advisor/Fiduciary to shareholders and has a good faith obligation to the ETF Sponsor. This means that an ETF Sponsor can petition the White-label/Adviser to do things, and the Adviser is obligated to consider these concepts, so long as they are in compliance with the 40 Act, in the best interest of shareholders,

​Can you convert a mutual fund into an ETF tax efficiently (or an SMA or hedge fund)?

​Can you convert a mutual fund into an ETF tax efficiently (or an SMA or hedge fund)? We receive the following question(s) almost daily: Can you do a tax-free conversion of a mutual fund into an ETF? Can you do a tax-free conversion of SMAs (separately managed accounts) into an ETF? Can you do a tax-free conversion of a hedge fund into an ETF? Long story short, yes, yes, and yes…but it’s complicated!(1)Note: this post was co-written with Sean Hegarty, CPA First, which problems CANNOT be solved by tax-free ETF conversions? Tax-free conversion transactions are not a panacea. Here are a few things we cannot facilitate: Can I dump my $100mm of Tesla stock into an ETF and then diversity into the S&P 500? No. Can I seed an ETF with my low-basis IPO stock shares [or fill in the blank monster winning stock]? No. You cannot dump a single stock position into an ETF and then diversify tax-free. There are strict diversification tests required to maintain an ETF’s status as a registered investment company (see below). What problems does a tax-free ETF conversion potentially solve? Here is the bottom line: You can convert an existing diversified (which has a formal definition outlined below) portfolio of stocks into an ETF. But it involves a decent amount of brain damage. Of course, the potential benefits for you and/or your clients are the ability to leverage the tax efficiency of the ETF and the ability to make your advice fees tax-deductible. Advisory fees are generally not deductible. But management fees inside a registered fund can be netted against income, effectively making them tax-deductible.Again, the exact details on ETF conversions are complicated and involve the specific fact patterns around your situation, but here are some high-level requirements to convert your current investment vehicle into an ETF, tax-free. Please note that when you convert your current asset base into an ETF you do not ELIMINATE taxes, you simply carry over your basis from your underlying investments, and your old basis is now the basis in your ETF shares. Questions to ask if you are thinking of converting a mutual fund (or SMA or hedge fund) into an ETF When contemplating the question of whether or not to convert a mutual fund into an ETF (or an SMA or hedge fund, for that matter), it is useful to ask yourself the following questions: Is your intent to continue your business in the ETF structure or is your transaction strictly for tax purposes? Intent matters. ETF structures are for investing, not day-trading. Transaction-heavy investment strategies don’t work well in an ETF. The underlying assets need to be US liquid exchange-traded stocks (or ADRs). International stocks are doable, but it adds costs/complexity. No stock position can exceed 25% of the net asset value. Realistically, you need to be under 20%. The sum of 5%+ positions in your portfolio must be less than 50% of the net asset value. Ideally, this is less than 40%. Ideally, the portfolio contains at least 25 positions. For SMA situations, it is easier if all the contributing portfolios are roughly similar, but it is not a hard and fast requirement. See section 851 for more details. A practical example of an SMA to ETF Conversion Acme RIA has 10 separately managed accounts with a low basis in Berkshire Hathaway stock. BRKA represents 50% of their portfolios and the other 50% is an equal-weight portfolio of 50 random stocks. Can you convert these portfolios into an ETF? Yes, with restrictions.BRKA is over 25% of the portfolio value (i.e., 50% in this example) and would break the diversification requirement described above. To facilitate this transaction, each of the 10 SMAs would only be able to contribute 24.99% as BRKA, and the remaining 75% would need to be represented by the equal-weight portfolio of 50 random stocks. The remaining block of BRKA would need to be held in the SMA and could not be part of the conversion transaction. The ETF, after conversion, would be 24.99% BRKA, and 75.01% in the 50 remaining stocks. Once the ETF is operational, Acme RIA, the portfolio manager of the ETF, could actively manage the portfolio to achieve its stated prospectus goals.(2)Here are some additional weeds on the situation above: All of this falls under tax-free conversions via 351: 26 U.S. Code § 351 – Transfer to corporation controlled by transferor Each transferor must send a “diversified” portfolio of securities based on 26 U.S. Code § 851 – Definition of regulated investment company https://www.law.cornell.edu/uscode/text/26/851 5% names must make us less than 50% of the transferred portfolio (Other RICs are excluded ~ read as GOOD ~ for this test). So you could transfer a bunch of low-basis ETFs in the conversion. (Note, the “diversification” definition under 351 is a bit different but we like to be conservative and hit the RIC standards). No name greater than 25%. No controlled securities totaling 25% in the same industry. No QPTPs totaling 25% (make life easy and hang on to your partnerships!) Note: Stradley Ronon and Morgan Lewis have a nice explainer piece on 351 here. Here are the mechanics, at a high level, on a tax-free conversion of SMA accounts into an ETF structure: Get a list of all potential clients who could benefit – make sure AFTER the conversion, there is a plan to deal with your newly found “affiliated fund” conflict of interest (typical approach is to net fees so the clients are equal). Work with your custodians to transfer assets of all accounts to the ETF. Seed Date (the night before launch) all of the securities are valued based on closing prices of the market and an initial NAV of the ETF is struck – this number is typically divided by $25 (the NAV per share) to create the initial shares of the ETF. Proportional shares of the ETF are sent back to each SMA account, accordingly. Tax lots in the shares are exchanged for lots in the ETF shares. Launch day – your ETF is