Exchange Traded Concepts is in a good place right now. The "white label" exchange-traded fund advisor has built a reputation working with money managers to launch custom passively managed ETFs for their strategies. Now the Securities and Exchange Commission has given ETC the go-ahead to help launch actively managed ETFs.
Money Management Executive recently spoke to CEO Garrett Stevens about what the Edmond, Okla., firm has in store on the product development front and what's essential to a successful ETF launch.
What are your plans now that you've gained exemptive relief for actively managed ETFs?
In the active space, we are the only white label ETF provider out there, and we have several clients who we have been talking to about launching active ETFs for. We received our notice for active relief last week, and we anticipate getting the actual order from the SEC in the next three weeks or so. Then we can begin filing for new funds.
What are the benefits of active ETFs for your clients?
Individual money managers with separate account strategies are looking at active ETFs as a whole new distribution channel. If they've turned away people who have less than their minimum, now they can send them to the ETF to get at the same strategy. With mutual funds, ETFs have been taking a chunk out of the mutual fund industry, and we're talking to a number of mutual fund companies who have said they'd really like to get their own ETFs out there. Hedge funds are the other big piece.
People who aren't qualified investors or don't have the minimum to invest but would like access to strategies can do so through the ETFs we're creating.
Any exotic strategies we can expect to see from ETC?
One of the things this active relief allows us to do is to offer ETFs of derivatives, where we're able to use swaps and things like that inside the portfolio for various types of strategies. So we will be utilizing that with some of these filings. On the passive side, we've got three fund filings already on file that should be ready for market in early May. We'll be filing for three new ones with three new clients, hopefully before the end of this month. We've had a lot of interest in income- and yield-focused products, as well as volatility- and sector-niche-type products.
What is your general feeling about the long road to active management relief?
It took us over 18 months to get there, and it was very expensive (laughs). From our standpoint, it really goes to the benefit of our clients. We also have another filing in already for additional passive relief - for fixed income, fund of funds, 130/30 and long-short. So we're constantly trying to have "state of the art" exemptive relief that our clients can take advantage of.
In your opinion, what makes a successful fund launch versus something that's just not going to get any traction?
ETFs are sold, not bought. So people need to be made aware of them. You have to go out and market your ETF. That's probably the biggest thing.
No. 2 is timing. We launched a master limited partnership ETF last March, and it's garnered almost $150 million over just 12 months.
Yield is what the market is craving right now, and products that have a yield or income focus to them are going to be doing well for quite a number of years. Being in the right place in the market at the right time is really what helps make a successful launch. A platform like ours allows you to do that, to get to market so much faster than doing it on your own and waiting for the active relief. We can launch passive funds in about 75 days from when we make the filing.
Meanwhile, all active ETFs have to go through the 19b-4 process with the New York Stock Exchange and the SEC. That slows filings down. It could be anywhere from a 90-day window to a situation like with JP Morgan XF Physical Copper Trust, which was in there for several years.
What are some things investors and advisors aren't crazy about now?
One of the things that's going to be interesting to see in the active space is that, even if you've been a money manager for a long time, you can't promote your track record on your ETF. You also don't get a Morningstar rating for three years.
So advisers and RIAs who are looking at new ETFs are going to sit and watch these ETFs for a little bit, as opposed to just jumping in because it's an interesting strategy. That's why you've seen slower uptake on the active side, and I think that's probably going to continue to happen for a while, especially to new entrants to the market. Meanwhile, if you've got a big brand and you've been around for a long time, people will tend to take your word, since you did well with your other strategies.
What's your sense of the active space this year? Are we going to see more funds from the same suspects, or new things from the fund firms you represent?
Both. The PIMCOs of the world will continue rolling out new product.
And you're also going to see new funds from people that we'll be bringing to market, hopefully before the end of the year. There have been a lot of active applications on file with the SEC for a while, and they're finally starting to let some of them filter through. So you're going to see new players come to market this year.
You still hear a lot of neat ideas everyday on the index side. But I think active is the next waterfall in the ETF space. It's just going to take a little time to get there.
What words of wisdom do you have for mutual fund or hedge fund managers looking to get in the active space?
It needs to be a product that's easily explainable to the public, because for ETFs, your marketing is different. It falls under FINRA guidelines and things hedge fund or separate accounts managers may not be used to. That's No. 1.
No. 2 is you've got to focus on having the distribution force to be able to get out and tell that story. The third is that they really need to hurry. We get four or five new inquiries every single day to launch funds. The joke is: Not only does the early bird get the worm, the early bird gets all the worms in the ETF space. First-to-market advantage is huge. Getting a fund to market takes a while, so firms thinking about launching one need to get started sooner rather than later so they don't get beat to market.
Is it still early in the game for active ETFs, or has the first inning started?
No, it's very early in the active side, much more than on the passive side. There's lots of room for a unique take. With hedge funds, managers are asking, why would people pay my hedge fund, when they can just buy the ETF version. We tell them, we're going to do a light version of your hedge fund, such as only using the loan positions and leaving the short and hedged strategies in the hedge fund. Giving people access through an ETF, and to have your brand and your logo on an ETF, is a great marketing tool to have.
Firms get a lot of publicity every time a new ETF is launched, more so than anytime a new separate manager comes to market or anytime a new hedge fund launches, where there's no coverage. People who see your ETF may call and say, "Now I'm interested in the hedge fund." So I think we're still very, very early in that type of the game.
Are you looking to hire?
Yes, in the near future. We're still discussing which positions internally, but it's probably going to be in marketing. To this point we've launched all these funds, but we've done no marketing at all, and the business has found us so far.
We want to be able to get a marketing person to make sure we're reaching out to the right types of clients and money managers who we think can take advantage of this platform first.