With issuers big and small continuously filling the development pipeline, the exchange-traded product lineup is inching closer and closer to the 1,500 mark. Innovation has always been one of the guiding pillars in the ETF industry and the debut of Exchange Traded Concepts only marks another stride forward in democratizing the investment landscape. Exchange Traded Concepts, ETC for short, recently made a big splash by offering up a cost-effective and completely turn-key solution for professional money managers looking to enter the growing ETF space. Garrett Stevens, CEO of Exchange Traded Concepts, recently took time out out of his schedule to discuss what makes his firm unique as well as his take on what role innovation plays and how it continues to influence the ETF marketplace.
ETF Database (ETFdb): Explain your idea behind creating Exchange Traded Concepts.
Garrett Stevens (GS): It came out of the experience we had with starting FaithShares and how expensive, confusing and drawn out that process was. My partner and I had no prior experience in the ETF space and were amazed by the technicalities and the industry itself. As we were closing FaithShares, we had several people approach asking us to consult with them on launching their own products or helping with the process. That’s where we came up with the idea to launch a series trust platform, they have been doing it in the mutual fund business for years, so we though let’s just do it with ETFs. The important part of the business is the white label; you won’t see our name anywhere, it is the client’s fund. The industry experience and advice that we bring really helps new managers to the space get up and running much faster under their own brand.
ETFdb: Who is Exchange Traded Concepts targeted towards? Why does it make sense for them to utilize the ETC platform?
GS: The target market is several fold. First, we have received a lot of interest from international firms. We are working with several foreign firms at the moment that would like to get into the U.S. market place but don’t understand the regulatory environment and don’t have the contacts with service providers or legal teams, so we do it for them. The other clients we work with are small and mid-tier mutual fund firms or investment advisors with between $50 million to $50 billion in assets, typically. Larger firms tend to like to do this in house, but for mid-tier firms our services are a great way to get into the business. Just to get to the markets and start a fund with us will cost you about 10% of what you would pay on your own. You will also not have to hire more staff; we handle a lot of the internal work such as marketing, operations and trading.
We also work with some mutual funds, hedge funds and separately managed accounts where we do everything from creating the website, carrying out the trading, and even the bill pay. We have what we call the “One Check” service; at the end of the month the client either gets a check from us or an invoice, but either way they don’t have to handle paying all the individual vendors that are associated with the fund. We have really simplified this to be a real turn-key program to get this to market.
ETFdb: There are some out there who think that ETFs have gone too far from their initial intention of offering broad-based exposure to buy-and-hold investors. What’s your take on the innovation in the ETF industry over the last several years?
GS: I wouldn’t say that some products have gone too far, but there just wasn’t a demand for it. There is a natural selection process in the industry; people bring products to market that don’t take off for some reason. Maybe they are too advanced, too confusing or the regulators don’t like them, but it’s a part of the industry and not everything works. We had a study a while back that showed that there were actually more mutual funds closing as the percent of the industry than ETFs. While it is unfortunate for those people involved, it’s a part of the maturing of the industry, and I don’t think it’s anything negative, just natural.
We will continue to see innovation; for example we brought the AlphaClone Alternative Alpha ETF (ALFA) to market and it’s not the typical buy-and-hold product, but it makes a lot of sense for some and it will do great. It will just take more time to gain recognition than a traditional large-cap ETF because of the extra education required to understand the strategy used. As a company that is something we are working to address; for example we are building out a marketing and distribution feature for clients. It will have several different components of outreach to the advisor community to educate them on the products, and we hope to bring this out soon [see also AlphaClone In Focus: Q&A With Mazin Jadallah].
ETFdb: What are some of the trends you are seeing as far as what kinds of products are quick to gain momentum? Can exotic ETFs compete with “proven strategies” in the same space for assets?
GS: Right now the strategies gaining momentum quickly are what investors need. People are starving for yield with interest rates stuck at historic lows; as such, we are bringing some yield-based strategies to the market by the end of the year because that’s really where the growth is. As far as the unique strategies like ALFA, it just takes more time to gain momentum. You see things like the “ETF Death Watch,” where after six months of low growth a product will show up on it. Maybe six months used to be an appropriate time frame for a standard index based product, but it’s not anymore. We tell people to be prepared to stand behind their products for a couple of years, to make sure it gets to market and has the time to become known. Also, the established firms see the launch of an ETF as a means to expand access to their proven strategy, while broadening their profile and expanding their brand.
Bottom Line: the ever-changing, and increasingly competitive, ETF industry is riddled with opportunities and traps for professional money managers looking to make a splash. Exchange Traded Concepts offers a completely turn-key solution for an efficient and seamless ETF launch from start to finish, making it possible for unique, innovative products to hit the street despite lacking the support of a big-name issuer.
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Disclosure: No positions at time of writing.
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