ETF Startup and Operation Costs

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ETF Startup and Operation Costs

Start up costs for ETFs vary greatly depending on various factors, such as the type and complexity of the ETF, and range from approximately $100,000 to a couple a million, in addition to seed money needed to launch the ETF. The type of trust is also an important factor, whether a series or standalone trust. Operating costs also vary widely based on various factors including advertising and marketing expenses and index licensing expense.

  • Kip Meadows, founder at The Nottingham Company, estimates up front costs range from $50,000 to $75,000, when a new ETF is added "to an existing series trust with all the exemptive orders in place." He also details operating expenses start at approximately $180,000 and go up incrementally as assets increase.
  • "ETFs must register with the SEC in a shared (series) trust or in a standalone trust format. A series trust is designed for advisers who want to start their own funds but avoid the complexities associated with organizing a standalone trust. In the series trust model, the organizational structure, including its Board of Trustees, is already in place, reducing costs and saving time."
  • Conversely, a standalone trust is preferred for those that want to establish a family of funds and/or have greater involvement in the administrative duties of the fund. "Advisers have more control with standalone trusts than with series trusts, such as having a key role in the selection of the initial board of trustees, fund officers, fund counsel, custodian, auditor, and administrator."

Start Up Costs

  • Investopedia explains start up costs for a new ETF can range from $100,000 to several million dollars and provides links to digital platforms, such as ETF Managers Group and Exchange Traded Concepts, that assist in creating and launching new ETFs.
  • ETF.com clearly states the start up costs and first year's expenses will be at least $300,000. They explain, "Much of the corporate governance structure looks the same for ETFs as it does for mutual funds. (A new ETF) will need a trust, an advisor and a board of directors. The board will likely hire a number of service providers, such as custody, fund administration, transfer agency, distributor, and audit."
  • According to independent financial-product consultant Bob Tull, start up costs for an ETF "from start to finish, for all the contracts, the average is between $750,000 and $1.25 million". But he adds that white-label firms, a kind of private label for financial products, can reduce ETF start up costs dramatically, closer to $100,000.
  • Specific start up costs include the registration of the ETF with the SEC, initial exchange listing fee, and initial marketing of the ETF.
  • The SEC registration can cost approximately $100,000 for a generic type fund or upwards of a half a million dollars for more complex funds.
  • Index listing costs between $5,000 and $10,000.

Operating Expenses

  • Several years ago, it was stated that initial operating expenses ranged closed to $150,000.
  • Yahoo! Finance estimates annual operating costs between $250,000 to $500,000 a year for one single ETF.
  • Bloomberg estimates, "It costs about $250,000 per year to run an ETF, with the exact amount depending on what the fund owns, which service providers it hires, and the issuer’s broader business."
  • John Jacobs and Richard Keary's white paper published in EFT Bild explains, "Roughly $650,000 in operating capital (is) needed to sustain an ETF for at least three years (average time frame for an ETF to hit breakeven). This does not include a marketing budget or seed capital. This number is an approximation for new issuers who are using a third-party platform. The costs will be higher if the manager is planning to handle all operational procedures internally."
  • Typically, operating expenses include a subadvisor and fund administrator, in addition to the most expensive expense category, marketing. Marketing costs vary widely based on the intention of the fund manager.
  • It is explained, "Licensing an index is not expensive, particularly in the early days of an ETF when total assets under management (AUM) are still small. According to industry sources, plain-vanilla U.S. equity ETFs often face 0.03-0.04% of total assets to license their underlying benchmarks. Specialized indexes can cost more, but paying 0.10% a year of AUM for an index is rare."
  • The index listing annual maintenance fee ranges from $5,000 to $40,000.

Examples

  • The SPDR S&P 500® ETF Trust Statements of Operations line items operating expenses (found on page 11) including trustee expense, S&P license fee, marketing, and legal and audit fees. The proportional ratio for each expense may be calculated using either the listed AUM or annual operating income.
  • Expenses for the iShares MSCI Emerging Markets ETF include investment advisory fees, commitment fees, professional fees, miscellaneous expenses, income taxes, and interest expense.

Research Strategy

The vast majority of relevant sources of information available in the public domain related to ETFs deal with choosing or investing in exchange-traded funds, as well as providing basic information about how they work. This research includes older research that corroborates the information found in the newer sources presented in the response. In addition, Quora is seldom used, therefore additional sourcing providing credibility to the respondents of the information found in the Quora post is included. Advice and best practices for launching an ETF may be found in articles published by Gregory FCA, as well as marketing advice. Details of the implications of the newer SEC rule governing ETF registration may be found in an article by Think Advisor.
Sources
Sources