Launching your ETF: three things to know
Published
July 2023
Establishing an exchange traded fund (ETF) can have enormous benefits for money managers, as the popularity of these liquid, accessible and flexible investment vehicles continue to flourish. But success is never a given. Strong competition and volatile markets are putting pressure on issuers, with many funds failing to reach profitable scale. Launching a successful fund requires, among other things, time, research, and working with the right partners. Overall, we think the considerations for launching an ETF can be summarized in three parts: defining your strategy, launching your ETF, and managing your ETF for success.
Defining your strategy
In a competitive market, we believe asset managers should have a clear understanding of the strengths of their firm. For example, do you have an over-riding investment philosophy? Are you active, passive, and which asset class/es do you specialize in? Are you comfortable disclosing your portfolio holdings daily or do you desire flexible disclosure? Is your strategy driven by client demand, or a new idea that needs to be tested? In short, it can be ill-advised to chase an investment fad or adopt a new strategy for the sake of launching an ETF.
Regulatory considerations are likely just as crucial. For example, cryptocurrency has come under scrutiny as an asset class - a potential hurdle to aspiring ETF managers in the space. The Financial Industry Regulatory Authority, or FINRA, is also examining sales practices for “complex products”, citing defined-outcome ETFs (such as funds that aim to protect investors from a market sell-off) as one example.
At a fund level, managers should consider their choice of benchmark, index methodology and desired transparency. For active managers, existing indices may not be an appropriate benchmark for their strategy. Here, working with an index provider that can prototype and back test a custom index may be the best route.
Additionally, active managers may wish to shield their intellectual property by altering how frequently they disclose their full portfolio holdings publicly. The NYSE offers consultative support and industry leading technology, via the NYSE Active Proxy Structure, for managers that value flexible transparency and IP protection.
For passive managers, finding an index partner who can create an index representing a differentiated strategy in a saturated market should be key. Our subject matter experts bring experience and innovation to help construct a new methodology approach to align with client's investment strategy. ICE also offers a deep expertise in developing thematic, ESG & climate and other forms of custom indices.
In addition, ICE also offers a Custom Index Tool technology which provides clients with a variety of ways to sandbox & back test strategies for many use cases including research, benchmark construction, designing a new financial product like ETFs or navigating the new world of Direct Indexing.
Launching your ETF
Vendor selection is a critical part of the launch process. This will include choosing a custodian and perhaps a distributor, sub-advisor (for portfolio management) and compliance function. An investment firm can build certain of these services in-house, work with a ‘white label’ provider, or choose one or more companies to outsource them for a fee. For those that are new to the space, the economics of outsourcing may be more favorable, as the variable fee structures tend to lower upfront expenses while they grow assets under management.
Maximizing the liquidity of an ETF should likely be more important than for a traditional mutual fund or other pooled vehicle. For issuers, this means seeking access to the deepest pools of liquidity. NYSE is the leading listing exchange for ETFs, with funds listed on NYSE Arca and the newly available NYSE Floor maintaining significantly tighter spreads and vastly greater posted size throughout the trading day compared to any other venue.
Because ICE has two-thirds of the U.S. listed ETF market via NYSE, we can maintain strong liquidity by directing listing fees into liquidity programs. These programs incentivize liquidity providers to make markets on our exchange - a dynamic that ultimately helps lower execution costs for investors when they trade in and out of ETFs.
In addition to robust liquidity, a price transparency feature which investors may seek is information on the value of a fund’s assets. Indicative Optimized Portfolio Value (“IOPV” also known as iNAV or iIIV) calculation service provides this to ETF investors to help evaluate their positions and make better-informed trading decisions.
Globally, ICE supports over 3,000 IOPV calculations to the leading financial institutions in the ETF industry with over $4 trillion in assets under management calculated daily. As the industry evolves and various types of investors continue to adopt ETFs, ICE plays an active role to support trading strategies that lead to best execution.
Managing your ETF
Launch day is always exciting, and there’s nothing more visible to a global audience than ringing the bell at the NYSE to mark the launch of a listed investment.
Ringing the bell is just one way ICE acts as a marketing amplifier for clients. We continue to invest in channels to better connect asset managers to investors and stakeholders that can help build their business. This includes leveraging the NYSE’s iconic event space at the corner of Wall and Broad Street to bring asset managers and investors together for educational events and investor days. This, coupled with the NYSE’s direct access to in house broadcast media and relationships with a variety of external media organizations, offers an unparalleled set of resources targeted at the ETF community. Our digital marketing support is brought together by our new website, ETF Central, which combines editorial and educational content, with free data and tools powered by ICE and the NYSE.
Once a fund is established, managers need ongoing access to specific resources, data and technology to keep an ETF running. Here, there are specialized platforms which consolidate these services. ICE ETF Hub offers efficiencies to standardize and simplify the creation & redemption process across the ETF primary market for all market participants to interact through a single platform. This is where relationships with trading desks, operations staff, transfer agents, and custodians come into play - and the choice of partners can play a major role.
For asset managers seeking to launch, list or promote an ETF, the exchanges, tools and networks offered by ICE and the NYSE can help create a robust foundation for success.
More broadly, the appeal of ETFs as liquid, accessible, and tax-efficient investments has continued to support their growth, as asset managers of all sizes seek to satisfy market demand - either by launching new funds or converting existing mutual funds. Where the first wave of growth was fuelled by passive managers, we think the demand for active strategies and a broadening array of asset classes now offer fresh opportunity for issuers.