By Kip Meadows, CEO of Nottingham
There are more than 2,100 ETFs in the U.S., each one the culmination of a complicated and possibly protracted legal process and multiple parties’ involvement both prior to and after launch.
How to Build a Watch – Under the Hood of an ETF
Here are some of the different groups involved with startup and operations who help make ETFs available to investors.
White-label issuer
White-label issuer is a term that is being applied to the ETF industry in a way it was not used with similar open-end mutual fund organizations. The startup process for any mutual fund involves filings with the SEC. A brand new mutual fund or ETF requires going through several additional processes, all of which add time.
The time and resulting expenses can be significantly reduced by partnering with a white-label issuer that already has the exemptive application and other regulatory filings in place.
Firms like Nottingham have gone through these processes numerous times (in Nottingham’s case, several hundred times over a 30-year history).
ETFs involve many moving parts after operations commence. There are ongoing relationships with attorneys, outside auditors, custodians, transfer agents, fund accountants, market makers and authorized participants (“APs”).
Most beneficial is that a while-label issuer has its own exemptive relief – a clearance granted by the SEC to launch ETFs. The legal structure of the series trust allows for multiple funds within the same series trust, using the exemptive order applicable to that trust. The time and cost savings for this attribute alone is many months to well over a year, and a minimum of $50,000 and probably closer to $150,000 in legal and related expenses.
Additional benefits of working with a white label issuer can be found here.
Related: 8 Strategies to Save Money Fast
ETF sponsor
While the term “sponsor” is not a legal term used in any way like other related parties to a fund or ETF, an ETF sponsor is where the idea for an ETF typically originates. This is a company or financial institution that sees a market opportunity for an ETF, vets the idea (usually with a white-label issuer or other consultative source) and decides to undertake the financial and other risks associated with starting a new ETF venture.
Nottingham was lucky to find a high-quality wealth management firm in Merlin Asset Management, which decided proprietary ETFs were the way they wanted to provide investment expertise to their client base.