Launching an ETF can be cost effective – but with the right partners

Last year saw the ETF industry grow considerably, both in terms of the sheer number of funds and its assets under management. It is fair to say it was a record year for the structure – over $500 billion into US-listed ETFs alone and a gain of 55% in AuM on 2019’s number.

According to data from TrackInsight, the industry had more than 6500 ETFs up and running at the end of 2020, with double digit growth rates across all regions. It is also worth noting that the active ETF market is taking off, with $80bn in net flows to active ETFs.

Traditionally a market dominated by the big players, we are now seeing more small to mid-sized firms appearing on the market. For many fund managers the new model of an ETF might also provide the more liquid strategies with a cost effective way to tap new capital streams.

Outsourcing can help you get started

The road to an ETF launch can be assisted considerably via the use of outsourcing partners, as this allows you to tap existing expertise and infrastructure.

The ETF promotor that seeks to focus on their core market advantages and identify where the remaining responsibilities in fund management lie, can be supported by partner organizations to deliver a cohesive and successful product.  A new ETF promotor will often seek out these partners to actually enhance their product. The success of a launch will be facilitated if you are using specialists who understand the ETF market, be it indexing, structuring, distribution or day to day operations.

Running a successful ETF business requires a level of operational infrastructure which many fund managers will simply not possess. This is because the ETF wrapper’s processes are closely tied to its unique distribution structure compared to the traditional funds which the manager’s legacy environment might be organized around.  While outsourcing of fund administration is commonplace for all types of funds, more firms are also embracing the outsourcing of their ETF portfolio management, operations and trading.

Outsourcing does not mean simply handing off critical activities to a third party. The fund manager retains responsibility for making sure everything runs smoothly. Regulators, exchanges and other key counterparties will expect to see a high level of professional oversight of any fund management operation that is expecting to list an ETF.

Among the key areas that need to be looked after are intra-day compliance and risk, real-time indicative NAVs and the effective distribution of the ETF’s portfolio composition information to market makers. The more active the strategy, the more day to day data management will be needed from outsourcing partners. 

Outsourcing partners for an ETF launch will need to have the efficiency required for handling authorized participants and supporting market making activity. Ideally, this should require the implementation of a dashboard of functions that a manager can draw on to oversee all mission critical services.

It is possible, therefore, to enter the ETF market with a product that can suit investors, so long as the project is operationally ready and fully supported. Outsourcing offers a more cost-effective avenue than building an ETF business from scratch and brings the added benefit of industry expertise to the table.

Truss Edge is a technology and consulting firm with the tools and the expertise to act as an outsourcing partner for successful ETF launches. We work with ETFs both large and small. We can build the required ETF activities around a portfolio manager’s existing systems to ensure your business is market ready for an ETF launch.

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