There has been a virtual explosion in the number of exchange-traded funds (ETF) in recent years, with hundreds of new funds being created that can satisfy virtually any type of investment objective. But not all ETFs are issued by the major contenders such as Fidelity Investments and iShares. Many smaller ETFs find their way into the market through the use of a white label service. These third-party services provide new ETF providers with a package of turnkey services that enable them to launch and operate their fund in a more cost-efficient manner.

Sam Masucci, head of ETF Managers Group, explained how white label ETFs work in a recent interview with ETF.com. (For more, see: How Big is the Global ETF Market?)

How White Labeling Works

Masucci explained that ETF producers who want to bring a new fund to market on their own will typically need at least $2 million to $3 million and launching the fund can take up to two years. Then there is the matter of finding skilled and experienced employees to run the fund’s operations, compliance and portfolio management and do the accounting and legal work. Furthermore, the costs to run just one or two of these funds is almost as high as it is to run 20 of them, so providers who are only launching one or two funds will face much higher expense ratios.

White label organizations like ETF Managers Group can do all of those things for the ETF provider and allow them to get up and running much sooner and at a much lower cost. Providers who come to ETF Managers Group can get their fund up and running within about 75 to 90 days if the fund is a traditional instrument that is governed by the Investment Company Act of 1940. The cost is about $250,000, which covers all operational expenses. Providers can bring new products to market in a much more cost effective manner with far less headaches.

Masucci also explained how the money is distributed from the fund. He said that the fund usually doesn’t pay anything to his company, unless the assets in the fund fall below the break even point. However, the company does get the gross management fee, although it pays a portion of this back to the fund company. The company also pays NASDAQ and all third-party expenses. (For more, see: The Main Attractions of ETF Investing.)

If the fund fails to accumulate enough assets under management to justify its existence, the provider client is the party that absorbs the cost. The company has the authority to shut down the fund, but it obviously won’t do this except as a last resort. For this reason, the company is very choosy about the funds that it will manage. Whenever a provider comes to them with an idea for a fund, the company carefully analyzes the fund’s portfolio and examines the investment theme. The company ideally is looking for ideas that aren’t already being duplicated by other funds.

Masucci asserts that his company offers services other white label providers do not have. “For instance, we're the only one that offers commodity pool products. We have ’33 Act products, which are futures-based ETFs,” he said in his interview with ETF.com.

The Bottom Line

White label organizations can help small ETF providers to launch their funds quickly and at a lower cost than going it alone. These companies can provide management services and handle all fund operations on an ongoing basis for providers who do not wish to undertake these activities themselves. (For more, see: A Look At the Growth of the ETF Industry.)

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