The business of ETFs

TrussEdge’s Dave Shastri and IMGlobal Partner’s Jeff Seeley are on the latest outing of Off the Record.Plan ahead and employ patience are key as well as finding the right partners to forge ahead in building your business, the pair say. 

This episode of Off the Record is sponsored by Truss Edge, providers of front, middle and  back-office software and services to ETF issuers.

Transcript

Beverly Chandler

Hello, my name is Beverly Chandler and I'm managing editor of ETF Express and I welcome you to the latest edition of Off the Record, the podcast about all things ETF brought to you by ETF Express in partnership with Truss Edge: providers of front, middle and back office software and services to ETF issuers. All views expressed in this podcast are the speakers’ own and we hope suitably controversial. This podcast focuses on the business of ETFs and the work involved in becoming an ETF issuer with a particular focus on distribution and I'm delighted to be here with Dave Shastri from Truss Edge and Jeff Seeley, Deputy CEO of IMGlobal partner, a global asset management network. Would you both just like to take a minute to tell us about yourselves and the firms that you represent? So, Dave, if you'd like to go first?

Dave Shastri

Hello, Dave Shastri here. I'm the chief strategy officer at Truss Edge. I've been in the investment business for 30 years, primarily in servicing investment managers. Our job here at Truss Edge is that we provide software to investment firms, issuers of about 15 billion in ETFs right now, covering synthetic and physically replicated index based ETFs as well as actively managed ETFs, and we handle both European UCITS and US 40 Act funds. We provide the software and middle and back office services for our managers.

Beverly Chandler

Thanks, Dave. And then Jeff, tell me a little bit about IMGlobal partner.

Jeff Seeley

Sure, thanks Beverly and thanks Dave. Super excited to be here with you both. IMGlobal Partner is a global asset management network with approximately $40 billion of assets under management as of a couple days ago; we have nine partners across the globe. We make minority investments in asset management firms and then work with them to grow their distribution, given that we're perfectly aligned as shareholders of those asset management companies. Back in 2018 I joined IMGlobal Partner to build the endeavour of our US platforms. We have a 1940 act Mutual Fund platform has about 9 funds and we have a ETF platform that we launched for the first time in 2019 as well, and that now is a growing part of our business with the ETFs, where we have four out of our nine partners that have launched ETFs with us across asset allocation products, alternative replication products as well as equity in the United States and outside the United States. So super excited to talk more about this today.

Beverly Chandler

So I'm going to start by just asking both of you, and Dave I'll start with you first. If you're considering launching an ETF, what does the firm need to do to commit to that for the long term until its profitable?

Dave Shastri

Well, I'm not an investment firm in terms of management, but the clear thing that we've seen with our clients that have been successful is focus on product strategy and distribution. Those things are obviously critical to any investment firm, but given the high cost of infrastructure in the ETF space the complexity of all the processes being right on product strategy is very important. Being aligned with distribution is very important. Both of those help you, but ultimately you need to have a long enough runway to succeed and the cost infrastructure keep that obviously contained in order to provide you with the longest runway possible. As as we know seed money is difficult to come by and you have to have that attraction, so figure out what your investors are after. Obviously, you know, today's markets have a big impact on that, which being in the right markets at the right time, but ultimately that distribution should drive everything.

Beverly Chandler

And Jeff, coming to you, what do you feel and what do you look for when you're looking at ETF firms you're taking these minority stakes in? What are you looking at, what makes a firm successful?

Jeff Seeley

We look at the firms from a historical perspective and we're looking for, you know, two to three decades of success in our asset classes, providing strategies to institutions, endowments, foundations, high net worth clients. Not every strategy though Bev, is perfect for an ETF, you know, and we spend a lot of time to find the right vehicle to broader align our partners. So it could be an ETF, it could be a mutual fund. The main thing I tell our partners is you have to have patience when you launch a new product. And by patience I mean, and I've been saying this going back to when I ran AMG funds distribution for 16 years, is when you launch a new product and you have a low seed capital amount, if you're not willing to give the product at least three years to build up track record, build the distribution, identify appropriate clients that might be suitable for this vehicle, don't launch it. But if you are willing to, you know really have the patience, the wherewithal and put the effort forward, you'll likely have greater success through that process.

Beverly Chandler

And Dave, I see you're nodding. So do you want to say anything to add to that?

Dave Shastri

Yes, indeed. And that's a significant runway like any business, you have to have been set up with with that in mind to create that success, very important.

Beverly Chandler

And and a major plank in building an ETF business is the distribution network, and that seems to be the top of the list at the moment. A lot of people are talking about it, particularly as new types of distributors are coming to the ETF world, we're seeing that in the US and in Europe. Tell me, Dave I'm sorry I'm gonna start with you again, but just tell me what you think's important to give to advisors who might distribute your product. What do you, what does ETF issuer need to have in place?

Dave Shastri

I'd start with flexibility. There there's each each distribution network, you have to listen to what the requirements are for that and understand that they may have different needs depending on the client market they have and the methodologies they use. And in order to do that, it may come down to being flexible and providing the information they require the way that they require it to help support them in their efforts to distribute their product. That can be frustrating because there's not like a catch all in some cases to deliver what you want out into that network. But in reality that's very important to interface to the way that they process because that that may be what drives them. So Jeff will have obviously intimate knowledge of that but from our process oriented approach to support our clients, that may mean different types of information flows for different investor requirements, different risk reporting, all sorts of different flow processes to meet their needs and in order to be able to to help them sell the product themselves.

Beverly Chandler

OK Jeff, just you come in here and tell us your experience.

Jeff Seeley

Yeah no, I I would say one of the things that most frustrates me, it could be with the mutual fund and even an ETF, both of them, is when you have a ETF that's three or four or five years old with an excellent track record, yet you see it with a small amount of assets and and that means I I truly believe that they didn't have a plan for distribution. You can't launch a product into these exchanges or out into the distribution without a proper plan to execute against, you know. It's not the you know, if I put it out there everyone will come because there are a lot of ETFs out there that you're competing with. So you also need to do your target audience, you know, what is the audience that you're trying to interact with with this ETF 40 Act vehicle. So for example, I mean just as a couple audiences, you have the institutional marketplace, you have the bank trust marketplace, you know you have the high net worth, you know, they have the intermediary broker dealers, the RIAs family offices. And then that could go on and on, turnkey asset management platforms. The question is how do you interact with all these platforms? Is your vehicle appropriate for them to start with? The other thing I would say too is you desperately need and you definitely need solid reporting for your ETF. Because the ETFs is like a stock. You buy it each and every day and it can be sold each and every day so the underlying advisor base and owner today might be different a week, two, a month from now, so the velocity of turnover within ETFs is very high. So there's a lot of, you know, great partners out there that will help you get the transparency you need to understand who the clients’ advisors are that are interacting with your ETF so that you can better interact with them. And then a couple of other things that you know we'll probably touch on later is within the distribution plan. Do you have a field sales force or don't you have a field sales? You know do you do it internally or do you partner with a third party? There's a lot of different decisions that go into that. I'm not saying one is better than the other. What I'm saying is if you go down one path, commit to it and if you go down the other path, commit to it. So if you have a third party marketer, commit to supporting them. Commit to providing them with content. Permit to them to you know for them to be successful. And then the last one I would leave on the distribution side where most people, ourselves included, we learned a little bit over the last five years ourselves, so acknowledging our and being humble that we're still understanding this area is. Digital is ever more important specifically for ETFs. And by that I mean there's a lot of platforms, there's a lot of areas where you can interact with clients to educate them on your ETF. And importantly, it's getting your name out there. Even the exchanges, whether it's NASDAQ or New York Stock Exchange, they will help you promote your ETF, but you can't sit back and say they're going to do it. You have to interact with them, provide them reasons why in content and make differentiate your ETF out there and tell the clients the feature and the benefit of it and why they would want to invest.

Beverly Chandler

And I see again Dave nodding a lot, so perhaps he'd just like to put talk to the technology angle of what Jeff has just said in terms of accurate quick reporting and information flow.

Dave Shastri

Yeah, I I'm picking up especially on the continuity of interaction actually, because speaking to that network once, that channel partner once, and responding does not provide you with the regular interaction that you need to do to keep pace with what's going on. And you, that's back to then responding to that, do you have the capacity to provide what they're after, ensure that you can do that and that there's some logic behind what you're distributing to that marketplace? So I I wholeheartedly agree and not seeing it from the front end but seeing it from the back end, that means that that might require you to provide, for instance, a new data feed, something really mundane like that in a different format because now they're able to distribute better information downstream. And so you need to provide slightly more content. That is a very real case of a deliverable that ends up really making all the difference in in responding to that network. So yeah, you have to, you have to be regularly there, very present.

Beverly Chandler

It sounds a little bit like what I do for a living at the moment which is, I can tell you, relentless. But important. OK, so we're just going to look at, we'll just look at the whole world. We'll we'll just go for the whole world, but starting looking at particularly Europe where regulations for ETFs are continuing to develop, given their growth of demand and the growth of the of ETFs in in Europe. Tell me, again Dave first. Just tell me what's been your observation of what people need to do to build an ETF business in Europe.

Dave Shastri

Well, even though it's Europe and even though they have overriding, overarching legislation regulation, the UCITS structure, what you're what you're going to have to do is is deal with each market. And each market, each market means a distribution in each market, which means also being able to to decide how you get into those markets and deliver into those markets and being able to provide the right product structure for that environment, because even though there's the framework for the product, the actual use case in each market is actually different. How they distribute through the banks, for instance, is quite a large part in Europe and then there are other solutions. Of course the balance between the institutional investor and retail investor in Europe is different than it is in the US. The product, the ETF product, has traditionally been used more on the institutional side and there is a shift now with an increasing use on the retail side. And so you will see regulations that therefore drive towards that because as the increase in your retail use is coming about then you are starting to see more concern amongst regulators to to to take a look under the hood of this product, they didn't worry so much when it was used by pension funds. So representing, you know, the different markets there. For instance Germany, savings plans; Italy, different distribution through the banks in Italy and France, particularly as heavily bank driven. Spain is a significantly growing market right now for ETFs, and use case of ETFs actually the highest percentage growths, so being able to understand each of those markets having distribution that is appropriate for each of those and therefore understanding that there will be requirements in those markets to meet.

Beverly Chandler

And then Jeff, let me just ask you about launching ETFs in the US? Give me a a clue of key items to address if you're launching in the in the US.

Jeff Seeley

Yeah. So like I mentioned, in 2019 I'd been in the industry for 26 years and the one vehicle I had never launched was an ETF. So you know, when we decided to go down this path I was like oh splendid, you know, I now have to learn a brand new way of. And and it's also new relationships, partnerships. It's not the same firms that you're going to deal with. So I would say the following. Again, it goes back to building a plan and we build a plan to, you need to identify who is the right custodian, who's the right TA that you want to work with, that has experience in the ETF market. You know, there are some firms that really truly have ETF specialists that can help you as a new firm. You have to identify, you know, again which exchange you're going to work with, whether it's New York Stock Exchange, NASDAQ, you know, and then you have to go out and identify to lead market makers who could be your lead market maker who wants to take on that work with you, APs etcetera. So it's not as simple as a, you know, mutual fund where you get a trust, a custodian and maybe work with somebody or you go into a mutual series trust. That's if you want to go down that path. If you do want to launch an ETF through a third party, you know mutual series trust in the United States, there's plenty of those out there and I'm not saying one is better than the other. We launched ours through a mutual series trust in 2019 because we didn't want to go out and have to take on everything initially. But we did have to get the lead market maker the APs, but our custodian and our TA were pre-selected for us through the mutual series trust, so we did, that was one decision we didn't have to make. The exchange was already predetermined for us through our trust, so some of those decisions can already be pre-made for you if you go down that path. We've evolved as an organisation where we have our own trust now, we have different relationships as we've grown, but in the United States there's a, you know, getting the right partners is critical. You know, for your success. And I don't just mean the right distribution partners. There's a lot of operational functional partners that are really going to find out whether or not you're going to have success or not is how committed they are. And the reason I say that is if you're a boutique firm launching an ETF, and I just talked to one of my old really close friends in the industry, if you're a boutique firm and you're launching an ETF that's different than from a branded, you know, monolithic large distributor out there that we all know. You know, one of the top 25 or 30 firms that haven't launched ETFs yet, but they're still thinking it through and how do they do that? They’re going to have different experiences because the brand versus the boutique are two totally different scenarios as you go out into the marketplace.

Beverly Chandler

Interesting, and interesting the differences between the two continents. Jeff, I'm going to come back to you actually. Could you just talk to me about 401K plans opening themselves up to ETFs? I've just done a story on FM investments who are seeking to convert an ETF to a mutual fund, so the other way round from what we've been used to seeing, because they found that they couldn't eat their own cooking (which we're keen on as a phrase) because they found it difficult to get ETFs into their 401K. Explain, can you give us a little detail on that? 

Jeff Seeley

So the 401K marketplace is the old ERISA marketplace that was developed, you know many many decades ago where you know the employee and the, you know, the employer are contributing to the employee’s plan under the 401K statutes. You know, there is a lot of movement here, but I would say it's still more to come in the 401K place. It's still a mutual fund dominated platform out there and for all the right reasons. I mean, if you think about it, a 401K and a mutual fund are pretty well aligned; a mutual fund is not daily traded, meaning intraday. You know you don't have 401K participants going to lunch and trading their portfolio, you know it's all end of day trading typically in a 401K. ETFs are a daily traded, you know like you could be buying and selling as we're doing this podcast right now, ETFs, and getting real price activity. I would say a lot of that is under discussion in the United States. A lot of that is under, you know, review by legislators and how that evolves, it will be critical to how ETFs interact with the 401K platform. If you think of it, that's the one of the largest pools of assets in the United States, the retirement plan system. And I do think eventually ETFs will participate in there. I just think the all the, all the people contributing to it are being very thoughtful as to ensuring that it's protecting the retiree, protecting the plan and making sure that it's feasible from a technology standpoint to be able to take on the intraday or you know, morning type trading or afternoon type trading that might take place in baskets, you know, but still more to come. It doesn't surprise me because we've even had that under discussion, taking a firm with an ETF and for the retirement plan, do we launch a mutual fund now so we can participate and then convert it to an ETF in the future. So that is not odd to me at all, that discussion.

Beverly Chandler

That's interesting. And just also to you Jeff, again staying in the US, the other thing we've done a podcast on this of ETFs as a share class. Do you feel that that phenomenon, if anyone doesn't know what that phenomenon is, you can listen to one of our earlier podcasts. But will that phenomenon see that mutual funds will stop converting to ETFs in the US?

Jeff Seeley

I I honestly believe and you can see the trends, you know, New York Stock Exchange publicises these out there. There's more and more funds converting to ETFs each and every quarter and I don't see that slowing. I'm not saying that, you know out of the X thousands of funds that are out there that they're all going to convert to ETFs, but when a fund family like Dimensional Fund Advisors converts their entire fund family to ETFs that's saying something that you know, the trend is likely here. You know, I discussed this with our own board and you know, it's a placeholder for us each and every quarter to discuss when is the right time, you know, and just at least if p-evaluating what our options are. We've discussed with our TA and custodian what would be needed? What is the timing? How fast could it happen? You know how slow could it happen? What's entailed with the conversion, etcetera. So we understand what would need to happen. We just haven't gone down that path yet ourselves.

Beverly Chandler

And you're not excited about ETFs as a share class?

Jeff Seeley

More to come on that is what I would say, you know, so.

Beverly Chandler

Early days still.

Jeff Seeley

Yeah, early days, but exciting days. I mean the ETFs are evolving. If you think about it back to 2005 or even the year 2000, it was a concept, the ETF, and now it's growing you know rapidly in the United States and around the world, and I think it's a great vehicle, honestly. Gives transparency to clients. It also gives transparency to allocators, you don't have to wait till the end of the month or the end of the quarter. You know, if someone’s building, we just worked with a large institutional client that is using our one of our ETFs and they wanted to know what was inside the ETF so that they could make sure that they weren't overweighting or having some undue exposures that they didn't desire from combining four other ETFs. So I do think it provides a great tool for allocators, institutions, financial advisors, and clients to understand what they're investing in and allocate appropriately.

Beverly Chandler

Interesting. Dave, do you want to talk to any of that or I'm going to ask you about European savings plans, which has been a phenomenon that's risen in Europe.

Dave Shastri

Yeah, we could move on to that, yeah.

Beverly Chandler

Let’s move on to that. So as you know, it's been absolutely crucial in raising assets in Europe. A lot of these savings, so-called Robo Advisors offering savings plans, are based on ETFs. Tell me, how does that affect the when when the ETF issuer is setting up their business in the hope that they'll be included one of these wondrous things and how, what what problems or issues does that raise for them, do you think?

Dave Shastri

Well, the savings plan idea has been, the savings plan structure has been around for a while but the the intersection of the savings plan with technology is what has created the growth and also the excitement about supporting this through savings plans, right? So that, that's essential. It goes back to transparency, of course, because the distribution works so well because of the transparency of the ETF vehicle itself. It demands a lot of technology to keep up to date with what's going on in order to market make what's happening in the ETF. And so yes, doing that, of course this also drives location. The ETF savings plans you can invest usually like the German one for at least, you know for like a euro. So if you can if you can drive that in in your monthly sort of paycheck that you're taking this much out, you know when when you teach your children to save money and their allowance, you say, well, how much are you gonna spend and how much are you gonna save? Well, that's the same principle that's going on here with the ETF savings plan. And the ease of doing that, the simplicity of getting access to it with technology makes a difference, which means that by by that same token that issuers have to be able to respond with technology as a technology provider, that is sort of where we obviously see our involvement, in distributing information down to the the networks that are selling that ETF. So more will happen because more will come on; some countries aren't as fast with that yet. So for instance, there isn't a system in the UK for that. The distributors aren't as as heavily distributing ETFs yet through their networks. But Germany is obviously the the 90% of it is happening there. It's obviously a a very large market, a very exciting market and so you know we we are supporting clients with that right now it is it's it's growing and I think super exciting because whilst we've seen a continuous 20 to 40% growth in AUM in ETF space in Europe, this is another contributor to maintaining that pushing forward and and so yeah, technology is is the catalyst I think.

Beverly Chandler

And then we're just briefly going to talk about multiple share classes for currencies and then distributing and non-distributing share classes. How does that affect ETF asset grow?

Dave Shastri

The asset growth with those those distributing products, the different share classes with different currencies for instance or distributing or accumulating. What they what they allow you to do, of course, is to grow the assets in a single ETF and therefore create a a larger pool without having to have separate vehicles for these currencies. And therefore you have more scale, scale’s important. Obviously, you know, meeting the needs of each market is possible. You could have done that with different funds, but by being able to pull them into the single vehicle. Now this may not seem terribly complicated, but it actually is a new thing for the ETF world, right? So there are little intricacies that that affects. The critical piece that it affects mostly is the PCF, the Portfolio Composition File, and how that gets downstream. When you didn't have to have multiple share classes and deal with it then it looked it looked the same, so being able to handle that is a new factor which, you know, if the issuer is able to handle that; if the service providers that we talked about before are able to support that (and not all are), but if they are able to support that properly then you'll have the ability to grow capacity with this single fund with multiple share classes, different types of distribution to meet the different tax requirements or the different savings aims of people through a single vehicle. So you're just growing, growing the asset base in a in a way that allows you to scale the ETF itself.

Beverly Chandler

And the global is the clue in your title of your company Jeff, so you want to just comment on that too in that this must affect you in Europe?

Jeff Seeley

It does, but it's something that we're a little less affected given that our ETF focus has been in the United States. We do have the UCITS right now so I would say it's something that we're examining right now and methodically, you know, going to consider for 2024 and 2025.

Beverly Chandler

OK. Well look, thank you very much gentlemen. Is there anything you'd like to add? I feel like we've dealt with this subject thoroughly, but anything from either of you?

Jeff Seeley

I would just add that you know the ETFs are an exciting time and, you know, the marriage of tech platforms, you know, and the ETFs are a perfect match for, you know, firms to help get exponential growth without having to build all the internal infrastructure.

Beverly Chandler

Thank you. And Dave?

Dave Shastri

Yeah, I think that it it's in a single vehicle like a single ETF, you can have access to all this underlying. And of course the thematics and all the different options that are out there. It is a tool that can be used very well. It's obviously it is a tool, it's a wrapper, but it is a very useful tool and I think one that will persist in the market, it will do very well.

Beverly Chandler

Thank you. Thank you both so much. I just want to say thank you to Dave Shastri of Truss Edge and Jeff Seeley of IMGlobal Partner for their time today and also to you for listening. This has been an Off the Record podcast from ETF Express brought to you in partnership with Truss Edge. Thank you.

Outro

Off the Record is brought to you by ETF Express. Production by Imogen Rostron and Lisa Hines and music by Otto Balfour. Thank you to our guests on this episode of Off the Record from ETF Express and to you for listening. We look forward to you joining us next time.