Exchange Traded Concepts: No More "Me-Too" Funds
May 4, 2012
Exchange-traded funds remain the young darlings of the alternative investing universe and one company is enjoying a booming business introducing this format to asset managers.
Exchange-Traded Concepts is a private label advisor which has permission from the Securities and Exchange Commission to launch both domestic and international funds for client managers. Clients act as sub-advisors in the funds, but get to put their names on the marketing of them. This allows them to offer different investing strategies more quickly and cheaply than on their own.
The company has had a busy April, helping clients Yorkville ETF Advisors, which has nearly $34 million of assets under management, and Horizon Exchange Traded Funds, which has $3.3 billion of assets under management, launch five products, including the Yorkville High Income Composite MLP ETF, Horizons S&P 500 Covered Call ETF and Horizons S&P Financial Select Sector Covered Call ETF.
ETC's CEO Garrett Stevens says the private-label fund creation business will continue to grow aggressively this year and that interest is coming from some new and unexpected places.
What's the outlook for ETFs this year?
There is a lot going on in the industry this year. In late May or June we hope to be launching at least five more funds [in addition to the five already launched]. We can have potentially 20 products by the end of the year.
We are working with, or will be working with, all of the major index providers, such as Dow Jones, MSCI, and so on.
One trend that has been especially interesting is overseas. We're working with money managers from all over the world, from Asia, Canada, Europe, Latin America, and South Africa. They're coming from all over the world to see about launching funds in the United States.
Who are your clients?
Our platform lends itself more to niche players. We are not in the position of launching the big broad "me-too" indexes. We are never going to launch another S&P 500 index-that is not who are clients are.
Our clients are more niche fund managers who know what they are doing in a specialized space. These are better thought-out, better designed, intellectual properties. These are not products developed during marketing meetings just to pump up sales.
For example, some of our clients, who are based in China, have very specific strategies for covering the country developed from specialized insights from living and working in that country for a while.
What do you offer these newcomers?
The regulatory environment is a big challenge. If you haven't done this before, there is a steep learning curve.
An ETF's moving parts are new to many people. They may not have dealt with market makers, the exchanges or with the SEC.
Going out and cobbling all of this [together] on your own is daunting. Developing your own ETF platform could cost you a million dollars and 18-months of effort before you get regulatory approval.
We outsource the whole process for you. We launch the fund under your brand and handle the filing and all of the administration issues. Using our platform, startup is closer to $100,000 and you can have your fund trading 75 days after filing.
Clients can focus on the things that help their business grow, like marketing and portfolio management.
What are you doing to meet demand?
We're very much focused on wholesaling and marketing for clients. Some managers have their own sales and distribution forces so they don't need help, but smaller managers haven't had the opportunity to spend a million dollars or so to develop these teams.
We just hired a sales force, both internal and external wholesalers, from Guggenheim (Partners). We are expanding our business in this area, so we can have sales and distribution staffers that clients can hire on a case by case basis. In this way, when they launch a fund, they can have boots on the ground: doing webinars, meeting with clients, investment advisors and major wire-houses.
Will ETFs overtake actively managed funds?
I think they will continue to gain share against mutual funds as more new and innovative products gain traction. However, mutual funds are not going away. They are still a great investment, especially in the active space.
One of the biggest factors preventing ETFs from overtaking mutual funds is that they aren't offered in most 401k or annuity plans. Mutual funds really are the standard there.
There are a lot of operational issues related to offering an ETF in a plan: the inability to have fractional shares and the trading costs, for instance. It's really a tough nut to crack.
When this gets figured out, it can lead to big inflows for ETFs.
What about actively-managed ETFs?
This is a space we are watching very carefully. We will dip a toe in with some clients later this year. We've already filed for relief with the SEC.
It is still very, very early for active ETFs. They will gather assets strategically. The next large cap growth manager won't be found in an ETF. Mutual funds will own the active space for quite a while.
There is definitely a space for active ETFs, but for now it will be mostly for more tactical types of allocations.
How about hedge funds?
A lot of hedge funds are telling us "I would really like a strategy in an ETF format."
Most can only take clients north of $1 million and would like an ETF to help them capture assets that they've been turning away. This is really where the bulk of interest has been coming from, either hedges or managers with high-minimum separate accounts. They don't want to deal with the hassles of managing thousands of little accounts.
It really is a new distribution channel for them. It lets them get out there in a very public way and increases their credibility in the marketplace.