How do exchange traded funds (ETFs) actually wind up on their exchanges? It’s probably not something to which you’ve given much thought – you see an ETF you like and you buy it. But an ETF’s life can start years before it ever begins trading, and Lisa Dallmer is one of the people who makes it all happen.
Dallmer, the executive vice president at NYSE Euronext, monitors exchange traded products (ETPs) and the index business around the world. She’s involved in nearly all aspects of an ETF’s life: linking up those who design and create indexes that will serve as benchmarks for ETFs to those who have ideas for ETFs. She also works to ensure that ETFs meet all the regulatory requirements for listing, and ensures that the funds’ trading operate as they should after they IPO. (Watch Tom Lydon and Lisa Dallmer discuss the basics of ETFs).
A Global Business Streamlined
Dallmer’s work has her traveling back and forth between the United States and Europe, ensuring that the approach to listing ETFs is as streamlined as possible in both markets. She points out that clients of NYSE are primarily ETF providers with products on both continents: State Street, Invesco PowerShares and iShares all have robust ETF businesses not only in the United States, but in Europe, as well.
The process of creating an ETF first has to begin with a good idea. “It ultimately has to begin with an idea that is appealing to investors,” whether it’s fixed income, international equity or a China-focused fund. Sometimes, the issuer will have an index in mind. Other times, the product is merely an idea. Either way, Dallmer’s team steps in to make it all happen.
NYSE put the product business next to the index business, Dallmer says, “because the product reflects the returns of a particular index.” Often, the index team and the issuer team are getting together and talking to a specific asset manager. (More on indexing).
Dallmer’s team has seen its fair share of ETF ideas come and go, so their opinions are often sought at some point in the creation process. But they’re not going to offer unsolicited advice if an idea doesn’t seem like a workable one. “We don’t really engage in a merit review process where we say this is interesting or not,” she says.
“People do come to us, and we provide anecdotal evidence. But if it’s a sixth to market product, it’s not my job to say five is enough.”
The Listing Process
Once an ETF idea is in place and an index has been put together, a prospectus is drafted and the Securities and Exchange Commission (SEC) is brought in for regulatory review.
There are two ways products are submitted to the exchange for listing:
- Generic listing standards: This often applies to products for which there’s already a broad-based mold in place. For example, if a product consists of domestic equities and there are already a number of those listed, it means the generic listing standard will apply.
- The “other” category: This is the category under which all other products that don’t fit the generic listing standards go, and it then has to be taken to the SEC. At that point, the SEC looks at the product, the prospectus and the exchange explains why they think it’s a reasonable product for investors to trade and why it’s justified under the exchange rules. (Creation and redemption explained).
Dallmer points out that actively managed ETFs have no generic listing standard, so every product that comes out is a unique filing. Once rules on a particular category of funds have been established, the generic listing standard is in place.