ETF Expert Corner

ETC CEO Garrett Stevens Talks White Label ETF Business, ETF Innovation

July 17th, 2018 by ETF Store Staff

Garrett Stevens, CEO of Exchange Traded Concepts (ETC), goes in-depth on the white label ETF business model and talks ETF innovation.



Transcript

You can listen to our interview with Garrett Stevens by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: Our next guest is Garrett Stevens, CEO of Exchange Traded Concepts, ETC. They're what's called a white label ETF provider. They help take great ETF ideas and bring them to market or they may simply offer different levels of support to ETFs, say in marketing or distribution. They currently have nearly 30 ETFs under their umbrella where they're providing some level of support or services. Those ETFs have over $5.5 billion invested in them including an ETF we'll spotlight later in the show, the Knowledge Leaders Developed World ETF. Garrett is joining us via phone today from Oklahoma City. Garrett, great having you on the program.

Garrett Stevens: Good morning. Thank you for having me, I appreciate it.

Nate Geraci: Garrett, we're certainly going to get into all the nuts and bolts of what ETC does, but to begin here, I’d first just love to hear your background and how you ended up down the path of starting a white label ETF provider.

Garrett Stevens: Sure. The story really goes back to 2009, a partner and I launched our own family of ETFs back then. We launched five of the FaithShares family of ETFs. At the time, it took us nearly a year to get the exemptive relief initially that was required, to get all the service provider relationships in place, the legal associated with it. All that cost almost a million dollars at the time to do that. After about 18 months, it became apparent that the funds were not gaining the traction that we needed in order to make them economic. So we closed a few of the funds. When we did that, we had several different groups of people reach out to us and they wanted to know if they could buy us just to get our exemptive relief or could we consult with them and let them know some of who our relationships were with, our contacts and things like that. That's really where the idea came from, that you know what, we have this infrastructure already in place, why don't we use it to help other people shortcut that line at the time for exemptive relief, but also for all of the contacts and relationships in place. So what cost us about a million dollars and close to a year to do, we were able to turn into a startup of about $100,000 for new clients and something like 75 to 90 days to get products to market. The reasoning was that if we had that money back, we spent a million dollars, if we had $900,000 of that back, we could've put that towards marketing and essentially had a different outcome from the success of our funds. That's really what led to ETC and the turnaround and the change of the business plan of ETC in 2010, and launching the first ETFs in their white label platform in 2011.

Nate Geraci: Garrett, you mentioned the FaithShares experience where perhaps you didn't get the traction that you wanted to initially. Besides all the infrastructure and the costs involved in setting up an ETF provider, I'm just curious, did you take anything else away from that experience?

Garrett Stevens: Well, several different things I think, one of which was despite what people tell you prior to launch, they're not all going to beat a path to your door once the fund does launch. So the marketing and getting the word out about your product takes time. ETFs, specifically, have a very flat-footed start from launch. You're not allowed under the SEC rules to market the product until it's been deemed effective by the SEC, which is at the end of that 75 days. So you're in a regulatory mandated quiet period. So once the fund is effective and you're ready to launch, it's really the first time you can publicly talk about the fund. Through that process, what we learned was that it's best to take your time there to try and help get the story out and do it obviously in a compliant manner, but to spend that time wisely while you're getting ready.

Nate Geraci: So tell us about ETC. I mentioned at the top of the program that most investors just see the finished products, the ETFs they own in their accounts. So explain for us what's going on behind the scenes with a white label ETF provider, what are the different ways you can help?

Garrett Stevens: Well, really, we offer a full turnkey service and can handle all aspects related to launching and operating an ETF on an ongoing basis. So at a high level for all funds, the 40 Act is the regulatory entity and rules that govern the relationship of investment products. So the 40 Act requires that you have a trust. So, typically, ETFs are a Delaware Statutory Trust. That trust has to have a board that must be made up of a majority of independent trustees. At ETC, we actually have three different trusts that we can launch product under. We work with different sets of service providers on each trust. So for instance, SEI and Brown Brothers and Bank of New York Service One Trust. Bank of New York and UMB Fund Services in Foreside service a different one. And U.S. Bank Fund Services service a third. The reason there is because it provides choice to our clients. It does not matter to ETC which one of those trusts we launch a fund under, but all of the relationships are in place from custody, distributor, transfer agent, fund administrator, fund accountant, tax and auditors, we have those in place on each of those trusts. The idea there is that we can provide the best in class service, best performance, and certainly best pricing by utilizing all of the various relationships that we have for any of our clients. That's just the fund operation itself, and just to be compliant with the rules. We also offer portfolio management for the funds. So we have many clients who come to us with an idea and maybe an index already in place. We can then actually be the portfolio manager for that, to handle creation/redemption activity with the fund, affiliated or assisted trades that are required, and certainly rebalancing trading and all of that. We also offer distribution. So we have a marketing services group who offers various distribution and marketing services for the funds once they're up and running. They certainly help with positioning in the media, public relations and all of the various facets that go along with it. So people come to us with an idea and we can turn it into an index or into an active ETF. Some people come to us further along and we handle the operational aspects for then and then everywhere in between.

Nate Geraci: To be clear, ETF providers can go a la carte, right? Just picking some services you offer - doesn't have to be all in?

Garrett Stevens: That's right, yeah. We really offer everything, but we can customize an approach depending on specifically what they need. We're happy to do that.

Nate Geraci: From an ETF provider’s perspective, what do you think the decision-making process should be as to whether they go it on their own or hire someone like you? What are usually the biggest pain points that bring an ETF provider to ETC?

Garrett Stevens: Sure, so we have this conversation a lot as you can imagine with perspective clients and it's what we call the build, borrow, or buy discussion. Those are really the three avenues that someone looking to launch an ETF has. So the first is do they build it themselves? Do they go out, set up that trust, get an independent board, go out and interview and do due diligence and hire all those various service providers and build everything from scratch? The second really is to borrow the infrastructure and that's from us. We are handling everything for them, they pay us a fee to do that, but then their time is really able to be spent marketing the fund and making the fund and the index the best that it could be. Or, do they go out and buy? There are other obviously small issuers out there who can be bought or we’ve seen some acquisitions in the space in the past. So there are obvious pros and cons to each of those approaches. We're obviously a fan of the borrow. We think it provides the most flexibility. We realize that we may be a bit of an incubator for somebody looking to get their first few products to market, but hope that over time they'll realize the value we provide and that they don't have to spend all their time trying to figure out what the board wants for lunch four or five times a year. That they're actually out doing things that are going to grow the assets of the fund and help it become successful – not dealing with operational and administrative issues.

Nate Geraci: I'm curious, we covered the proposed ETF rule in quite a bit of detail a couple of weeks ago on this show, does that change your value proposition at all just because it will theoretically be easier and less expensive to bring new ETFs to market?

Garrett Stevens: We really don't think it does. The ETF rule, really all that does is change the amount of time it takes to get permission to launch. It really doesn't change anything as far as having to do all of the work associated with the launch. Exemptive relief is just a filing, you send in the filing and you wait, and it's become easier and easier. Over the last couple of years, it's gotten down to where you can get exemptive relief in 30 or 60 days and for $15,000-$20,000 – as opposed to the year it took us originally five, six years ago. It's something that has really not been as big a hurdle recently, which I think is why the SEC is finally getting around to this rule which has been proposed for some time. All you're getting is permission to proceed there. You're not getting around any of the work and effort and expense involved with the setup, the infrastructure, and all of the regulatory issues associated with it.

Nate Geraci: Our guest is Garrett Stevens, CEO of Exchange Traded Concepts, they’re a white label ETF provider. Garrett, I'm assuming you hear pitches for new ETFs all the time, so what's the wildest idea you've ever heard and I guess more importantly, what makes for a great idea? What are some of the markers you look for that you believe will give an ETF the best chance for success?

Garrett Stevens: Well, you're right, we do get pitches all the time. We get several inquiries a day typically. People who have all kinds of ideas, certainly some are better than others.

Nate Geraci: That's remarkable.

Garrett Stevens: Yeah, what I would say is we have heard on several occasions the marijuana fund is a big idea that's out there a lot. We've actually had two or three folks come to us who wanted to do a physical marijuana fund - so I would say a commodity fund. They were offering storage, certain temperature and humidity controlled environments. They wanted to basically set a price and turn different types of marijuana into different commodity pricing type things. I can't even imagine the regulatory issues that would come with that, how someone might audit that and on a regular basis, and everything that would come with it. But we heard that several times and I obviously passed on that opportunity.

Nate Geraci: So what makes for a great idea then?

Garrett Stevens: Well, what’s making for great funds recently is a couple of things. So certainly something unique. The ETF industry is one where first mover advantage has been a very big factor for a long time in an ETF. So you can look at a lot of examples of funds that were launched weeks apart and the first one gets a lot more traction than the second. So it's got to be a unique idea at this point. A lot of the broad-based indexes in that waterfront have certainly been covered, but we're still getting a lot of unique ideas. There are new sectors in technology and things for instance that are just new and nobody's had access to them before. So we're able to bring those unique type products to the market. The second is it's got to be something people understand. We do get a lot of new ideas and maybe it's in an asset management or it's in a smart beta type approach rather than a thematic type fund. While it may have good performance, it may have a good track record running live assets in some other way, sometimes they are so in-depth and so confusing frankly to try and understand, that ETFs historically have got to be easy to understand. It's got to be something that an advisor can talk to a client about very succinctly and get them to understand what it is in order for it to be successful. Then, of course, we're seeing a fee race at the moment. It's a race to the bottom as far as fees go, so the product needs to come at a reasonable expense ratio and something that will be competitive in the landscape. Because what you'll see happen is if you come out even with a good product, if it's priced too high, someone will launch a similar product at a much lower price and be able to take market share from you. So it's got to be different, it's got to be something that people can understand and identify with, and it's got to come at a reasonable expense ratio.

Nate Geraci: Well, I should note on our program next week, we're actually going to visit with Chris Buck over at ROBO Global. We're going to spotlight the ROBO Global Robotics and Automation Index ETF, which I believe is the most successful ETF under your umbrella. If I'm correct, that thing has over $2 billion invested in it. Did that check all the boxes, did you know that was going to be such a success?
Garrett Stevens: It did early on. We launched that product in October of 2013, so it's been around nearly five years at this point and it was the first of its kind. It was a theme that was hot at the time and of course, it has continued to be. It's going to be an important piece in the way the world works in the future with robotics and automation, so it continues to be a product that we're very excited about. From the very beginning, it was one of those where everyone looked around and thought why has no one done one of these yet, this makes perfect sense. Of course, like you said, it has $2-2.5 billion in it. Obviously, it's resonated with the market, so we continue to have very high hopes for that one and have enjoyed watching that one.

Nate Geraci: You mentioned “why has nobody done that before?”, and you began to touch on this a little bit earlier, but as it relates to ROBO, if an ETF like that experiences a lot success, it seems like you pretty quickly see copycats enter the space, and that's certainly been the case here around robotics and automation and AI. Is there anything ETF providers can do to really protect their intellectual property or is the key here simply get an idea to market as quickly as possible and hope you establish a first mover advantage, kind of build a little bit of a moat around the idea?

Garrett Stevens: It really is. From an intellectual property and legal standpoint, there's really not much you can do. Unfortunately, people can change their index just a little bit different from yours, create one rule or something that makes it slightly different and there's really nothing you can do from a competitive standpoint about that. What I would say - and what the ROBO team has done a great job - is they built a very nice organization around this product and they have brought in a real A-team of researchers and analysts to help continue to refine the index and do very deep diligence on the companies that go in there. So you really have what, in our opinion, is the best constructed index of all of the robotic ones out there. You do see follow on products who basically try and market it based on the name, and they understand that it's hot and it's gathering assets, so let's just launch our own. But I can promise you none of the others have the intellectual property that's gone into this index and the thought and research behind it to really make sure that they're covering those companies who have the exposure to this and who are really seeing growth in their particular piece of the robotics and automation world.

Nate Geraci: Well Garrett, we'll have to leave it there. Really interesting conversation today. Thank you very much for your time.

Garrett Stevens: You bet. Thank you all, appreciate it.

Nate Geraci: That was Garrett Stevens, CEO of Exchange Traded Concepts and you can learn more about ETC by visiting exchangetradedconcepts.com.