How to build an ETF:
Building an ETF range which can be offered alongside other structures like mutual funds, structured products, separately managed accounts or investment trusts is a high priority for many European asset managers.
Just as a coffee company can sell their product as beans, ground coffee, pods, instant powder or pre-mixed iced coffee, so can an asset manager add to their distribution firepower by adding an ETF category to their product range. Many will already offer multiple wrappers including mutual funds, hedge funds, structured products and so on. Adding ETFs is simply extending this foot print.
Without an ETF range, asset managers risk being excluded from the many distribution channels that are focused on ETFs and will be at a significant competitive disadvantage to managers who recognised the distribution potential of ETFs earlier on. While many investors have replaced expensive, clunky index mutual funds and ‘closet trackers’ with ETFs, there are
currently limited options for investors to perform the same exercise for the actively managed portion of their portfolios – but this is changing fast.
Build an ETF: Three Routes to Market:
For the asset managers asking “How do I build an ETF?”, there are three options: 1) build their own business from the ground up 2) acquire an existing business or, 3) partner with a white-label platform. There are pro’s and con’s to each approach:
Building a European ETF business from scratch can be a time consuming and expensive exercise: 24 months or more are needed to establish a team, build a fund platform, perform product R&D, develop marketing strategies and formulate sales plans. There are also significant overheads to consider in terms of staff, office space and legal fees. All in, an asset manager could spend between £5-10 Million before a penny of assets are raised.
Asset managers that want to build their own business also face a steep learning curve in terms of a building a specialist ETF architecture and expertise required in capital markets, product management and distribution strategies – all of which function in a very different way to mutual funds. While companies with large scale and extensive resources may be able to commit to this level of investment, this route may not make sense for firms with fewer internal resources or those that want to launch a smaller ETF product range. Many companies have launched ETFs in Europe and then failed to raise assets as they did not fully appreciate the specific complexities of European ETF distribution or believed they could sell ETFs in the same way as mutual funds – these often proved to be expensive and embarrassing mistakes. For these reasons, build-your-own is a high commitment, high risk and high cost approach that is open only to large companies with significant time and resources to commit.
Buying entry to the market is also likely to be a high commitment and high cost approach – on the assumption that a suitable target can be found. In Europe, there are few takeover targets remaining to make this route to market seem appealing or possible. Buying up a third-party fund range also comes with the potential difficulty of buying up products that could conflict with a managers’ core offering or future strategy. Reliant on chance and opportunity, this approach cannot be utilised by the majority of asset managers and does not provide capacity for many new entrants.
If building is too expensive and buying too difficult then asset managers can look at a third option – full service white-label ETF platforms.
White-Label ETF Advantages:
A white-label platform, like HANetf, can enable any asset manager to build an ETF without having to build their own ETF business from scratch. By providing the complete regulatory, technological and distribution infrastructure necessary to bring funds to market, white-label platforms make it faster, more cost effective and simpler to launch ETFs, whilst retaining the brand identity and investment skills of the underlying asset manager. Almost any asset manager – indexed, systematic or active – can bring their investment IP to a white-label ETF
platform to get a product launched, but it is important to note that not all white-label platforms provide the same combination of services. Some platforms merely provide the regulatory and operational infrastructure to manage ETFs.
Other platforms, like HANetf, take a different approach, providing a comprehensive service that goes beyond launch to provide ongoing sales, distribution and marketing programs. With a full-service offering, asset managers do not need to establish their own platform, expert sales teams, capital markets relationships, service provider relationships or marketing programs and can focus on what they do best – developing and refining investment ideas.
The primary advantages for asset managers using a white-label platform to build an ETF are:
- Cost efficiency – massive reduction in cost-to-market
- Rapid market entry – by leveraging an existing infrastructure, an ETF can be brought to market in ~8 weeks
- Large scale – with an existing sales, distribution and marketing infrastructure, white-label platforms can offer broad reach and high scalability from day one
- Small scale – managers who want to launch only 1 or 2 ETFs can do so economically via a white-label provider
- Expertise – clients without experience in the nuances of European ETFs can gain immediate access to experienced sales, distribution, capital markets and marketing professionals
- Focus – outsourcing the day-to-day management of an ETF enables asset managers to focus on developing and refining new investment propositions
The launch of HANetf in 2017, Europe gained its first independent white-label ETF platform, opening the gates for a wave of innovation and new participants in the European market. Given the fragmentation of the European marketplace, and the differences between ETF and Mutual Fund distribution, HANetf provides not only a UCITS ETF platform, but also an embedded sales, marketing, distribution and PR capability, giving on-platform funds the greatest chance of success by providing an experienced pan-European sales team and sophisticated digital marketing infrastructure from day one. The impact is already being seen as the barriers to entry diminish – as of January 2021, HANetf has launched 45 ETFs with 15+ asset managers, each with very different businesses and approaches- click for case studies:
Embracing the Future
Asset managers who dismiss ETFs because “We are active and don’t do passive” are missing the point. An ETF is just a distribution technology for any investment style or strategy. ETF growth continues to be propelled by strong regulatory, demographic and structural tailwinds, with the European ETF market predicted to triple to $3 Trillion by 2029. Clearly, there is a significant fee-base for asset managers to win, retain or lose. Asset managers positioning themselves to compete for this growing fee base recognize that ETFs will be a core part of
their future growth strategy, but understand the challenge is not just creating an ETF but creating a sustainable long-term and successful ETF business.
Only the largest firms will be able to approach the complexity of the European ETF marketplace with their own in-house ETF offering and team. Some firms will lack the internal resources to create their own business while others may only want to launch a smaller number of ETFs for flagship strategies and funds and not have the scale to warrant the development of a standalone platform.
The ETF opportunity is not just limited to the largest companies who can dedicate years of time and millions of dollars of investment in starting an ETF business. ETFs are democratic investment products and companies like HANetf are making it easier for asset and wealth managers of all shapes and sizes to participate in the growth of the market and better serve their clients by removing the structural, commercial and operational barriers to entry that they have encountered.
As trillions of dollars of assets migrate towards ETFs, we believe that every asset manager needs an ETF strategy – now.
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