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Wednesday, July 21, 2021

So You Want to Launch an ETF

Reported by Neil Anderson, Managing Editor

The ETF side of the asset management business continues to be a hot space for both new entrants and existing fund firms to debut products. Yesterday several leaders at back-office allies to fundsters offered some tips for fundsters eyeing the ETF space.

Start With Demand

Sonja Ursul Formato
Foreside Financial Group, LLC
Senior Director
When considering an entry into the ETF space, fundsters may want to avoid Field of Dreams logic.

"First off, you want to make sure that the marketplace is looking for whatever you're bringing to market," Sonja Formato, senior director at Foreside, said yesterday during the day one sessions of the two-day SunStar Strategic 2021 ETF/MF Conference. Formato was speaking on a panel, entitled "ETFs: The surge to participate and how to grow," that also featured: Mike Castino, business development officer and senior vice president of exchange-traded products at U.S. Bancorp Fund Services; and moderator Bret Eichenberger, practice leader of the registered funds group at Cohen and Company.

"It's not 'Build it, and they will come' anymore," Formato adds.

"You're not going to tell the marketplace what it wants," Castino agreed.

Castino and Formato urged fundsters to reach out to key regional B-D, wirehouse, and RIA allies before launching new ETFs.

"What are they trying to solve for? What do their clients need?" Formato asked.

"The ETF space is very receptive to people reaching out pre-launch or pre-discovery," Castino said. "I'd rather bring out the right product in due time than the wrong product in a short amount of time."

ANTs Are Great, But ...

Formato and Castino discussed the recent introduction of translucent ETFs (i.e. "semi-transparent" ETFs or "active non-transparent" ETFs, also known as "ANTs") to help active asset managers enter the ETF space without disclosing their secret sauce on a daily basis. Yet it's not the only option for active managers entering the space.

"There is still great work being done on the active, transparent side," Formato said. "Ark has had great success, and they're fully transparent."

MF to ETF Conversions Aren't For Everyone

Converting an existing mutual fund into an ETF can be a way to tackle the seed investment needs. (Castino noted that exchanges traditionally required at least 100,000 shares for at least $25 per share, which translates into $2.5 million in seed capital.) Yet such conversions are "not for everyone," Formato warned.

"It's a very lengthy process. There's a lot of considerations that go into that," Formato said. "It's a comprehensive project."

One key issue can be investor retention, Formato and Castino noted.

"If you've been around for a long time, and you've had a successful mutual fund, there will be a subset [of your fund's shareholders] that has no interest in converting to an ETF," Castino said.

That leads to another option: instead of converting an existing MF into an ETF, one could instead keep the MF and create an ETF that is meant to be a mirror image of the MF. That does translate into higher costs (since you're running two funds instead of one), but it may be worth the cost, Castino said.

"Why would you forgo those anchor clients ... who still want a mutual fund?' Castino wondered aloud. 

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