How Do You Build a Winning ETF Business?

There’s More Than One Way to Build an ETF Business

The ETF industry continues to grow, but there is no single blueprint for building a successful ETF business.

Some firms build their ETF capabilities internally. Others rely on outside specialists as they grow. Successful products can create the economics to build infrastructure over time. And firms with substantial resources can acquire established ETF businesses and buy scale.

The right approach often depends on where an asset manager is starting, what capabilities it already has and how quickly the ETF business develops.

Buying Scale

Goldman Sachs provides a timely example.

Goldman completed its acquisition of Innovator Capital Management earlier this year, adding an established defined-outcome ETF franchise.

More recently, it announced an agreement to acquire NEOS Investments, a specialist in options-based income ETFs.

These acquisitions aren't simply about adding AUM. Goldman is acquiring established products, investment expertise, intellectual property, people, distribution and ETF infrastructure.

Rather than developing every capability organically over many years, a firm with Goldman's resources can accelerate the process by acquiring businesses that have already built them.

That's one way to become a larger ETF player: buy the scale.

Most asset managers, of course, aren't going to acquire an established ETF business. Fortunately, they don't have to.

Building Scale Organically

There is another path I watched firsthand during my time at VanEck.

VanEck was already a successful asset manager with established mutual fund and separately managed account businesses when ETFs became an increasingly important part of the firm.

The success of products such as

, followed by

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and others, helped VanEck develop into a major ETF provider.

It didn't happen overnight.

Successful products created assets, revenue, brand recognition and distribution momentum, providing the economics to continue investing in the ETF platform and its infrastructure.

Roundhill offers a more dramatic recent example of what can happen when organic growth arrives very quickly.

Roundhill was already a successful ETF issuer before launching the Roundhill Memory ETF

. But DRAM's extraordinary growth has taken that success to another level. In a matter of months, the fund has grown to roughly $27 billion in assets.

With a 0.65% expense ratio, a product of that size can fundamentally change the economics of an ETF business.

Investing more heavily in sales, marketing, capital markets, product development and operations becomes a very different decision.

Capabilities that may once have made more sense to access externally can become economically attractive to build internally.

A home-run ETF doesn't just gather assets. It can help finance the next stage of an asset manager's growth.

But home-run products are the exception, not the rule.

What About Everyone in Between?

Many successful ETF businesses grow much more gradually.

They launch a product, gather assets, add another strategy and continue building. The business may be progressing exactly as planned without yet having the economics to support a large dedicated ETF organization.

That doesn't mean the issuer should go without the expertise it needs.

It means there may be another way to access it.

This is where fractional resources can become another path to growth.

If an asset manager already has an appropriate trust and infrastructure, it may use them.

If not, a white-label or series-trust provider can supply much of the infrastructure required to launch and operate an ETF.

The same approach can extend to other areas of the business.

Capital markets expertise can be accessed to work with APs, market makers and exchanges, monitor liquidity and spreads, assist with baskets and launches, and help coordinate larger trades.

Sales and distribution can be supplemented without immediately building a large national sales organization.

Marketing can be supported externally through content, digital strategy, branding, advisor outreach and investor education.

Specialized resources are also available across legal, compliance, operations, administration, custody, product development and other parts of the ETF ecosystem.

The objective isn't to outsource everything.

It is to determine what the asset manager already does well, what it needs to own, and what it can access more efficiently from specialists.

Scale Changes the Answer

Importantly, that answer can change.

The infrastructure that makes sense for a new ETF business may not make sense after significant assets arrive.

As a platform grows, certain outside functions may make economic and strategic sense to bring in-house.

Others may remain external because specialists can continue providing them more efficiently.

Fractional expertise can therefore be part of the process of building an ETF organization rather than an alternative to having one.

Instead of taking on every fixed cost before the revenue exists, an issuer can access expertise as needed and selectively build internally as the economics develop.

A breakout product can accelerate that transition. Steady organic growth can get you there over time. And firms with sufficient resources can take a very different route and acquire the capabilities they want.

Which Path Will You Take?

Another model worth watching is Corgi Invest.

Rather than waiting for a small number of products to achieve significant scale, Corgi has rapidly built an unusually broad ETF lineup across a range of strategies.

While its assets are currently concentrated in a smaller portion of that lineup, it will be fascinating to watch how the broader platform develops.

And perhaps that's the larger point.

There is no single path to building an ETF business. Some firms build gradually, some find a home-run product, others use fractional expertise as they grow, and firms with sufficient resources can acquire established businesses and buy scale.

Still others are experimenting with entirely different models.

The ETF ecosystem has matured enough to support all of them.

For asset managers entering or expanding in ETFs, the question may no longer be whether there is a path available.

The question is: Which path are you going to take?

Disclaimer

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.