Education

How to Launch an ETF: The Complete Guide

John Williams

Aug 2, 2023 — 3 min read

Launching an exchange-traded fund (ETF) can be a complex process, but also a highly rewarding endeavor for investment firms looking to offer investors a new fund option. This complete guide examines key steps for how to launch an ETF successfully.

TL;DR: Launching an ETF requires meticulous planning, filing proper documentation with regulatory agencies, finding an authorized participant to facilitate share creation, choosing a stock exchange to list on, and executing a marketing strategy. Work closely with legal counsel and partners to ensure full compliance.

Let's dive deeper into the topic.

Select the ETF’s Structure and Objective

The first major step is deciding the structure and investment objective of the new ETF. Will it track a market index like the S&P 500? Focus on a specific sector or asset class? Or actively managed by a portfolio manager? The ETF’s objective will dictate much of the launch process.

Research the competitive landscape as well to find an untapped niche or strategy. Offering a unique fund can help attract investor assets versus crowding into an already saturated area of the market.

Partner with a Trustee and Custodian

ETFs require entering agreements with key service providers that perform critical roles in fund operations and compliance.

A trustee oversees the fund’s overall management and administers shareholder interests. Trustees are often divisions of large financial institutions.

The custodian holds the fund’s cash and securities. Custodians must have robust security protocols and insurance coverage to safeguard assets.

Conduct proper due diligence in selecting high-quality partners that can smoothly handle the day-to-day ETF mechanics.

Register the Fund with the SEC

ETFs are regulated investment vehicles, so new funds must complete proper filings with the Securities and Exchange Commission (SEC) before shares can be issued.

The registration statement outlines the ETF’s investment objectives, principal strategies, risks, costs, and management. Submit drafts of the registration early on to allow time for any revisions the SEC requests.

Hire knowledgeable legal counsel to ensure all documentation meets regulatory requirements. Navigating registration and compliance intricacies often requires expertise.

The entire SEC approval timeline can take several months to upwards of a year. Account for these potential delays in the launch schedule.

Find an Authorized Participant

A crucial partner for ETF launches is securing an authorized participant (AP). APs are large broker-dealers that facilitate share creation and redemption directly with the fund.

This involves the behind-the-scenes ETF arbitrage process that keeps shares closely aligned with the net asset value (NAV) of the underlying portfolio.

On launch day, the AP will purchase the initial fund shares, called the seed basket, to kickstart trading. Lining up this arrangement early is key, as not having an AP would stall the launch.

Select a Stock Exchange to List On

While the ETF sponsor oversees the fund’s operations, the shares themselves must trade on a stock exchange. Popular listing venues include the New York Stock Exchange, NASDAQ, and CBOE.

The listing exchange handles the trading logistics, disseminating price quotes, order matching, and more. Each exchange has its own listing criteria that must be met.

ETF issuers should research which exchange best aligns with their product and investor demographics. This listing partnership is also formalized through contracts.

Prepare Marketing and Distribution

A major priority for ETF launches is spreading awareness and promoting investment.

Creating marketing materials like product brochures, website pages, and press releases is crucial for publicizing the new offering. These should communicate the fund’s strategy, key benefits, and competitive differentiators.

Lining up distribution partners such as investment advisors, broker-dealers, and crypto asset management firms will expand sales channels. Pitch the ETF to firms that focus on suitable investors.

Marketing and investor education should begin months before launch to prime interest. This can help spur trading activity and asset flows from day one.

Execute the Launch

Once all the prep work is complete, the launch date arrives. The authorized participant purchases the initial seed basket of shares, the ETF commences trading on its stock exchange, and assets can start accumulating.

Successful marketing and distribution efforts will help drive early trading volume. This establishes market pricing and liquidity right out of the gate.

The launch is only the beginning. Ongoing promotion, building awareness, adding distribution partners, and potentially lowering expense ratios are key to gathering more assets over time.

Regularly evaluate if the fund is gathering enough assets and meeting return objectives. Be ready to close the ETF if it fails to gain traction.

Key Takeaways

Launching an ETF is a multifaceted endeavor that requires extensive planning, preparation, and coordination with partners. But done right, a thoughtfully constructed ETF can flourish and provide value for many years to come. Keep these tips in mind: