ETF-prenuers: An Introduction to ETF White Label Services

ETF-prenuers: An Introduction to ETF White Label Services Interested in starting an ETF? Interested in converting a managed account, hedge fund, or mutual fund into an ETF? Simply want to learn more about the process of launching an ETF? This piece is an introduction to ETF white label services, the industry term for a firm that helps an “ETF-prenuer” bring an idea to the public market.We will map out the following: The typical use cases for an ETF The basic process to launch an ETF The high-level costs of launching an ETF The niche group of specialized providers who can help you bring an ETF to market Editor’s Note: there is a podcast version of this post, which is a nice follow-up to reading this article. Recently, we did a follow-up podcast with Pat Cleary. Audio/visual learners should check these out.Before diving into ETF white label services, we’ll share our story of how we ended up in the ETF business. The Alpha Architect story Not many people know the history of Alpha Architect. I’ll spare you the details because it involves 3 failed attempts in the asset management business, including the launch of a small value quant hedge fund in September 2008. Great timing, eh? Building a solid investment strategy is one thing. Building a solid investment business adds a set of challenges. Source: Unsplash and Alpha Architect art studioWe finally caught a lucky break after getting punched in the face several times. Alpha Architect was formed in July 2010 and was eventually seeded by a huge family office in 2012. We launched an ETF business several years later via angel funding from an SMA client in late 2014. We essentially took the investment strategies from separately managed accounts (private) to the world via ETFs (public) as we believe ETFs were a superior structure.Fast forward to 2020. We’ve spent a decade strategically minimizing the chance we ever have to get a real job, and I’ve managed to lose 95% of my hair. Some may not consider this a success, but we are living our adventure, and we don’t have to file TPS reports, so not all is lost!https://youtu.be/Fy3rjQGc6lAAll joking aside, why bore you with our history? We strongly empathize with entrepreneurs and their challenges in starting a financial services business. We’ve been there. But now that we’ve survived for over a decade in a cutthroat business, we sometimes forget how challenging the world can be for new business owners seeking to bring their ideas to the financial marketplace.Case in point: Perth Tolle. Perth TolleI originally ran into Perth at an ETF.com conference in Florida. Perth pitched us on her passion for ETFs, freedom, and desire to combine the two concepts. I was 50% sold. Freedom sounded great.(1) However, I was a bit sour on the other 50% — the whole “launching an ETF” aspect of the deal. After bearing witness to the insane competition in the ETF industry and the high fixed costs of launching an ETF, the prospects of launching someone else’s ETF idea weren’t exciting. We politely told Perth, “No thanks.”Fast forward to 2018. Perth continued to express her passion for launching an ETF. I kept providing obstacles: “Where’s your funding?” “Where are your investors?” “Do you know how terrible the ETF business is these days?”And then I provided excuses: “We don’t want to open our ETF platform. We don’t have the capacity to deal with this right now.” The back and forth continued. Perth was the hungry entrepreneur; I was “Mr. No.”But to Perth’s credit, she addressed every obstacle we put in front of her: she raised operating capital and identified some heavy-hitting investors. She convinced us we could open our ETF operating platform and help ETF-prenuers enter the game. We were sold. Alpha Architect would enter the so-called “ETF white-label business” and offer our infrastructure and know-how to help ETF-preneurs fulfill their dreams. Why Launch an ETF? The ETF structure is not a panacea; every investment delivery vehicle has different strengths and weaknesses.Here are some basic costs and benefits of the ETF wrapper versus other investment vehicles: Potential costs High fixed costs (i.e., a magnitude more expensive than launching an LP or SMA) High transparency (i.e., the world will know what you own) Distribution transparency challenges (i.e., hard to identify who sold what) Potential benefits Transparency (i.e., the world will know what you own). This can be positive or negative, depending on the audience. Tax efficiency (i.e., the potential to defer capital gains on equity, bond, and options instruments via in-kind transactions) Market access (i.e., type in a ticker, and the buyer is now a proud owner of your investment strategy) Operational efficiency (i.e., one can manage a tactical strategy via one ETF versus 1,000 SMA accounts) Case Studies Here are the typical use cases we have seen: Asset manager (e.g., hedge fund manager or mutual fund manager) with an active stock selection strategy looking to gain operational efficiency and the tax advantages of the ETF Note that we can turn hedge funds into ETFs in a tax-free transaction. Multiple restrictions apply, but it is possible. RIA is looking to simplify its trading operations and improve tax efficiency It is now possible under certain circumstances to transform a managed account book into an ETF in a tax-efficient manner. Research and development firms with unique intellectual property and a broad audience that seek to monetize their IP via asset management What are the Basic Requirements for Launching an ETF? The process for launching an ETF can be broken into four phases: Planning Pre-launch Launch Ongoing management. We include some generic timelines for each phase, which vary wildly depending on the situation. On one extreme, if you are squared away and we have some luck on regulators’ responsiveness, we can launch an ETF in ~4 months. On the other hand, if you require more coaching, are trying to do something extremely innovative, and have bad luck on the regulator front, it might take 12 months + to launch an ETF.Arro Financial Communications has a