As the exchange traded fund industry grows, more money
managers are jumping on the bandwagon and creating their own
ETFs. However, some new entrants are neither large money managers
nor mutual fund families. They're small companies, or just guys
with a dollar and a dream of running an ETF.
To help these people achieve their dream, a niche business
called white-labeling ETF companies has emerged to build and
launch funds for a fraction of what it typically costs.
Creating an ETF "from start to finish, for all the contracts,
the average is between $750,000 and $1.25 million, and anything
less than that is a gift," said Bob Tull, an independent
financial-product consultant, who has helped develop more than
300 ETFs of all kinds. "That's the total for exemptive relief,
the prospectus and all the contracts."
But because they already have the infrastructure in place,
white-label firms can help a small player bring an ETF to market
for about $100,000.
White-labeling, most commonly seen on generic products in
supermarkets, is where one company produces a product or service
and lets another company put its brand name on it. Thus, the
second company looks like it made the product.
The ETF industry consists mostly of huge money managers or
mutual fund companies, which built the infrastructure to create
. But many of these new ETF players have little, if any, of this
infrastructure. Instead of spending the money to build it on
their own, they've outsourced the job to ETF white-labelers.
White-labelers have brought more than 30 funds to the market,
and many more are in the works.
"A lot of people don't want to deal with the daily
requirements of maintaining the ETF. That's what we do for them,"
said Sam Masucci, the chief executive officer of Exchange Traded
Managers Group, a private-label issuer firm in Summit, N.J.,
known as ETFMG.
Using Exemptive Relief
More important, the small player gets to use the exemptive
relief previously obtained by the white-label firm. In order for
an ETF to trade on the
, it needs to break a few rules in the regulation that controls
mutual funds, the Investment Company Act of 1940.
The ETF firm must apply to the Securities and Exchange
Commission for permission to break the rules. This permission is
called exemptive relief. Depending on the complexity of the fund,
it can take upwards of two years to be awarded.
After a firm receives its exemptive relief for a category of
funds, the process to create additional ETFs can take a little as
This concern made PureFunds, an independent ETF research house
based in Mendham, N.J., go with a white-label firm instead of
filing on his own. PureFunds Chief Executive Officer Andrew
Chanin said he had already seen ideas he wanted to launch get
scooped up by other firms and hit the market.
"Our big fear was we would file for the fund and it would take
too long to approve," said Chanin. "Being a start-up, if someone
beat us to the market, that would be enough to sink the company
before we got out of the gate."
ETFMG helped PureFunds launch thePureFunds ISE Junior Silver
), which tracks small-cap silver-mining companies. ETFMG helped
PureFunds develop and vet the idea and find an index maker to
produce the index and methodology requirements.
It then helped write the prospectus and let PureFunds use its
exemptive relief. During the time the SEC was reviewing the
filing, ETFMG put in place all the third-party agreements with
accountants, lawyers, authorized participants and the exchange it
would launch on. Now, ETFMG manages the daily operations for the
Meanwhile, PureFunds is responsible for marketing the fund and
bringing in assets. Currently, the fund has just $5.6 million in
assets under management. But that could soon change. Year to
date, the fund is up 26%.