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.

We 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!

All 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.

I 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:

1. Planning
2. Pre-launch
3. Launch
4. 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 great piece outlining the various aspects of the ETF ecosystem and how they all fit together. The graphic below is a snapshot and highlights the complexity involved.

As a potential ETF-prenuer, know that our job is to deal with the mess below; your job is to build interest in your intellectual property and identify capital to fund your ETF adventure.

Below, I outline each of these phases and how we would tackle them. Other parties likely follow a similar path.

1. ETF Planning Phase (0 to 6 months)

• Implementation Timeline
• Regulatory workplan
• Marketing/Distribution workplan
• Economics, pro forma finalization
• Contracting, licensing as needed
• Competitor analysis (Is this product unique? How should it be priced? Why has it not been launched already? etc.)

2. ETF Pre-Launch Phase (2 to 6 months)

Pre-launch is the second phase of bringing an ETF to market. This phase is fairly work-intensive for our side and your side. Be prepared to put the time in so your ETF launch succeeds. A few of the items we’ll take care of in this phase are as follows:

• Index creation/data construction (this is only a requirement if you choose the Index path versus the active path)⁽²⁾
• Registration/prospectus drafting (a heavy legal lift)
• Iteration with regulatory agencies (i.e., SEC). This process can vary depending on the idiosyncrasies of the SEC.
• Data controls established
• Vendor management (who are we using for the various pieces that require outsourcing)
• Board approval, Trustee engagement (we present your idea to our Board, which has ultimate authority on whether or not we can launch your strategy)

3. ETF Launch Phase (1 month)

The launch is the third phase of bringing an ETF to market. At this point, the plan is in motion, and it is time to execute. A few of the items we’ll take care of in this phase are as follows:

• Basket Creation
• Exchange listing completion (coordinate with CBOE, Nasdaq, or NYSE)
• Marketing coordination (prepare websites, factsheets, etc.)
• Capital markets management
• Seed capital deployment⁽³⁾
• Index coordination (as required)

4. ETF Management Phase (Ongoing)

Ongoing management of the ETF is the final phase of the ETF process. We are officially live, and it is time to share your excellent idea with the investing public. A few of the items we’ll take care of in this phase are as follows:

• Vendor management
• Printing/filing
• Regulatory disclosures
• Liquidity assessments and filings⁽⁴⁾
• Ongoing marketing
• Invoicing/vendor payments
• Trading and execution
• A dedicated compliance team supported by external counsel

How Much Does it Cost to Launch an ETF via an ETF White Label Platform?

Launching an ETF is a highly complex operation with many moving pieces, which means the precise cost estimate will depend highly on the situation. However, the items below will give the aspiring ETF entrepreneur the ballpark all-in costs for a standard US-equity-only, quarterly-rebalanced, in-kind ETF. These costs are associated with the “white-label” option.⁽⁵⁾

We break our cost estimates into four components:

1. Start-up costs
2. Fixed costs
3. Initial variable costs
4. Scale variable costs

1. Start-Up ETF Costs:

Start-up costs cover all the costs of the initial consultations during the planning and pre-launch phase and the costs to get the legal and compliance documentation prepared and finalized. The all-in costs for a non-frills, fairly generic fund are typically around $50,000, but this figure can vary wildly depending on several factors. The costs for an ETF start-up can easily range from $40k to $150k+.

Here is a rough breakdown of the items included on a standard deal:

• Launch fee ($8k-$20k+)
• Registration Statement (22.5k-30k+)
• SEC Filings/XBRL (3k-5k)
• Board meeting/Prep (15k-20k)

Additional start-up costs are tied to compliance support and 351 tax-free conversions (something we specialize in).

2. Fixed ETF Costs:

We have tried to make the pricing on the ETF white label as transparent as possible. In our own experience, the pricing typically involves some fixed element, with a million footnotes highlighting random “nickel and dime” costs. Well, when you add the nickels and dimes, they are material costs. So, our fixed costs estimate internalizes and underwrites everything into one simple figure (if you want a more detailed assessment, reach out).

All-in, you are looking at around $175k to $200k+/year (But this can range from $190k to $300k+). If you want to trade in international markets where custody costs are presumably higher, the costs will increase. Also, if the ETF cannot be traded “in-kind” there will likely be additional costs. Of course, there are other circumstances where the fixed costs could be lower. Again, this is a high-level estimate and a starting point for a discussion. We always seek to deliver affordability so ETF sponsors can survive in the ETF business!

The key elements included in these fixed costs:

• Regulatory/Legal
• Fund Services
• Capital Markets
• Portfolio Management
• Business Consulting
• Marketing and Distribution Consulting

3. Initial Variable ETF Costs:

In addition to the fixed costs, there are several variable costs that we pass through to ETF servicing clients. These costs grow with your fund and are ‘triggered’ from day 1.

These include the following:

• Custody/safekeeping costs
• Data/index license costs
• Marketing material review costs from our broker/dealer partner and FINRA
• SEC fees (24f-2 fees)
• Printing fees
• Independent Trustee Counsel fees (as they relate to your specific ETF)
• Exchange listing fees

We typically advise that these costs will be around $15k to $25k/year but can vary considerably depending on your unique situation.

4. Scale Variable ETF Costs:

Initially, an ETF operation is dominated by fixed costs and the variable costs mentioned above; however, there are additional variable costs at scale.

As part of our pricing schedule, we pass through scale variable costs that cover the costs we incur from our operations and service providers. These costs also cover higher insurance costs, adding portfolio management complexity and other costs that naturally scale with more AUM.

The scale variable costs are additional costs on top of the fixed costs and variable costs mentioned above:

• 6-15+ bps on AUM above $100M and below $250M
• 4-15+ bps on AUM above $250M and below $500M
• 4-12+ bps on AUM above $500M
• 3-8+bps on AUM above $1B

A Quick Example of ETF profit/loss

Let’s say you launch an ETF, the fund scales to $400mm, and you charge 50bps (an incredibly smashing success). We will also assume you are in the mid-range on the estimates above.

Here is the generic profit/loss breakdown:

• Revenue = 50bps* 400mm = $2mm
• Servicing costs: $225k fixed costs + 8bps(250mm-100mm)+6bps*(400mm-250mm) = 225k +120k + 90k = 435k
• Variable costs: $10k custody + $400 * (129.80) + 15k marketing materials ⁽⁶⁾ = 77k
• Gross profits = $2mm – 435k – 77k = ~1.5mm

Again, the discussion above is meant to get the aspiring ETF-prenuer oriented on the ballpark costs they can expect to face when launching an ETF.

The key takeaway is that launching an ETF is not a simple or cheap operation. Before tackling this endeavor, you’ll want to have the operating capital necessary to manage operations for at least 3 years and have a reasonable ability to attract new investors over time.

Who Can Help You Launch an ETF?

The ability to provide full-spectrum ETF white-label services is a somewhat unique skill set, so the options available are relatively limited. Launching an ETF is akin to getting married, so you should rely heavily on the incentives and integrity of the service provider.

We recommend you talk to several ETF white-label providers to ensure a good cultural fit. You effectively enter a strategic relationship when you partner with an ETF white-label provider. As many in the industry have learned (e.g., HACK), the ETF servicing counterparty is critical to your long-term success as an ETF sponsor.⁽⁷⁾

We also believe in “skin in the game” regarding ETF white-label providers. Does your provider have their funds on their platform? What legal risks do they have if something happens with the white label? Skin in the game best aligns incentives between the white-label service provider and the ETF sponsor. Platforms provided by large fund administration groups and custody banks may have incentives not aligned with the ETF sponsor. These platforms generally punt the most significant legal risks and complexities to the ETF sponsor.

Finally, one must consider how much brain damage one will incur when dealing with an ETF white-label provider. Some providers are “one-stop shops” (like us), and others are a “hodge-podge” of service providers. Some providers will present you with multiple invoices; some will provide you with a single invoice (like us). Some providers will require a full-time employee to manage the ETF white-label provider; some will require a part-time effort, at best (like us).

In short, costs are always important but aren’t the most essential aspect when considering a strategic partner in the ETF business.

ETF White-Label Services Providers

Our services (i.e., ETF Architect): Our solution aims to lower the cost of access to the ETF market, focusing on delivering affordability, turnkey operations, and transparency.  We lean on our technical know-how and current ETF operations to provide what we believe to be the most affordable and transparent ETF white-label service in the market. However, we do not provide direct marketing and distribution support as an in-house service. We can connect you with various providers/individuals specializing in marketing products for 3rd parties. Still, we will not focus on selling your product (see the option below if you are looking for dedicated distribution services in addition to white-label services).

Tidal ETF services: Mike Venuto et al. offer white-label services with a comprehensive offering similar to ours. Their platform includes strategic guidance, product planning, trust and fund services, legal support, operations support, marketing and research, sales, and distribution support services. If you are looking for ETF services plus heavy support on sales and distribution, we recommend you talk to Mike and explore their offering (contact us, and we’ll put you in touch).

Sound Capital Solutions: Mike Castino and his team offer white-label services and consulting. Like our platform, they focus on affordable access to the ETF market but do not provide distribution and portfolio management services. If you are looking to build out and operate your own trust, reach out to Mike (or contact us, and we’ll put you in touch).

The options above will cost roughly the same, depending on the required services. Some additional options are on the market, including Exchange Traded Concepts and the ETF Manager’s Group. Still, we are less familiar with these firms and their offering (our understanding is they are generally more expensive but can offer additional services).

You can always build your own vertically integrated ETF shop if you are bold. The up-front costs to create an enterprise with full ETF trading and execution capabilities, professional compliance/operations support, and the numerous systems and know-how required to facilitate a professional ETF operation are substantial (i.e., millions of dollars). Not to mention the ongoing costs of operations. That said, with enough money and enough gusto, you can achieve anything. We’ve proven that to be the case; however, just because something is possible doesn’t mean it is a recommended course of action.

Finally, you can also explore a hybrid DIY/outsource solution. You could build your Trust and compliance and outsource the complex ETF portfolio management via a sub-advisory relationship with either Vident (speak with Amrita) or Penserra. These firms are highly professional and do a great job managing the brain damage associated with ETF portfolio management.

If you want to go the full “DIY route” or partial DIY, we can help point you in the right direction. Reach out.

Conclusion on ETF white label services

We believe the tax efficiency, transparency, and low-cost nature of the ETF structure will ensure that the investment vehicle remains a favorite for investors in the future. Setting up an ETF is a serious endeavor that requires a total commitment. We encourage asset managers and financial advisors to explore the vehicle as a potential way to enhance their client experience. We fine-tune their value proposition in a highly competitive market. Please reach out if you have any questions — we are here to help and seek to support all ETFprenuers!