The exchange traded fund (ETF) industry has nearly 1,000 funds in the United States alone and nearly $800 billion in assets under management. Amid all this growth has come intensifying competition for new entrants into the space.
The pressure for new providers comes on several fronts: they need to have the time and devotion to wind their way through the various regulatory hurdles, they need to have the startup money and, perhaps most importantly, they need to have a unique angle that ensures their product stands out from an ever-growing crowd.
The Launching Process
Grail Advisors is one such relatively new ETF provider that successfully jumped over the various hurdles. Grail launched the industry’s first actively managed ETF in June 2009 – Grail American Beacon Large Value (NYSEArca: GVT).
The launch of a new ETF, especially when it’s your first, is a significant time and financial commitment. That means that if you want to be a player in the ETF industry, you’ve really got to want in. [3 Active ETF Misconceptions.]
Stacy Fuller, a member of the investment management practice group at K&L Gates, says, “I think they need to be prepared to make a real commitment and investment in the ETF marketplace. ETFs don’t always sell themselves; there can be big startup costs for an advisor.”
Every ETF starts with a filing with the Securities and Exchange Commission (SEC) for exemptive relief. This process alone can take anywhere from 9-18 months, says Fuller, who counsels actively managed, index-based and leveraged ETF providers on the exemptive application process.
The filing process for Grail took about 14 months, which was slightly longer than hoped, given that the provider was securing relief for a first-of-its-kind fund. [Pure-Play ETFs: Worth the Risk?]
After the exemptive relief is obtained, the ETF needs to be registered, which takes another 60-90 days, depending on the ETF’s strategy.
Once registration is done, the ETF provider needs to work with the SEC’s Division of Trading and Markets, get an interpretive letter and a listing standard.
“These are things any ETF needs, but the process is longer for actively managed ETFs,” Fuller says. This is largely because the groundwork has been laid for index-based ETFs to skip many of these steps, but that groundwork isn’t yet in place for actively managed ETFs. [Active ETFs: Why Low Volume Doesn’t Mean Illiquidity.]
“It can take quite awhile to get a new ETF out the door if you’re starting from scratch,” she says.
New ETF providers should be sure they’re going into ETFs for the right reasons. Given the time and money involved in getting funds off the ground, the passion has to be there.
William Thomas, Grail Advisors CEO, says that new entrants are often either moving into the industry for offensive or defensive purposes. In other words, they’re either doing it because ETFs are the hot, new thing or because they truly have a vision for their product.
“A lot of firms are doing it for defensive purposes, and not really quite sure of what they want to do in the ETF marketplace,” says Thomas.
Finding the Right Partners
From the get-go, Grail’s vision was to secure subadvisors for all their funds and not manage money themselves. Thomas says they also don’t want to be tied to one investment firm for all of their strategies, but to find the best match for each strategy through a careful due diligence process.