Rent or Build? The Capital Markets Decision Every New ETF Issuer Must Make

One of the Most Important Decisions in an ETF Launch

For asset managers launching their first ETF, much of the focus naturally falls on the investment strategy, distribution plan, and marketing. But one of the most important decisions often happens behind the scenes: whether to build an internal ETF capital markets function or rely on external support.

The answer is rarely straightforward. It often depends on a firm’s existing infrastructure, operational capabilities, and long-term ambitions within the ETF market.

The Operational Question

Before capital markets considerations even begin, firms must evaluate whether their middle and back office can support the additional workflows that ETFs require. While the portfolio management process may remain familiar, ETFs introduce new operational demands including daily basket processing, creation and redemption coordination, exchange relationships, and interaction with authorized participants and market makers.

For firms already operating complex mutual fund or institutional strategies, some of this infrastructure may already exist. For others, launching an ETF represents a meaningful expansion of operational responsibilities.

Understanding how the ETF structure fits within the firm’s broader operational framework is often the first step in determining how much internal support is required.

The Role of White-Label Platforms

Many first-time ETF issuers choose to work with a white-label platform. Firms such as Exchange Traded Concepts, Vident, SEI, and others provide valuable services by helping managers navigate the operational and regulatory complexities of launching an ETF.

These platforms can handle many of the structural elements of bringing a fund to market, including administration, distribution, and regulatory oversight. For managers new to the ETF ecosystem, this can significantly reduce the time and cost required to launch.

However, white-label providers typically support many issuers simultaneously. While they generally do an excellent job providing the infrastructure needed to operate ETFs, their model is designed to scale across multiple clients. As a result, certain areas—particularly capital markets support—can sometimes follow a more standardized approach.

Where Capital Markets Becomes Critical

Capital markets plays a unique role in the ETF ecosystem. Responsibilities often include coordinating with lead market makers, onboarding authorized participants, designing efficient creation baskets, working with exchanges on launch logistics, and helping ensure the ETF trades efficiently relative to its underlying holdings.

These tasks are highly dependent on the specific strategy being launched. An ETF investing in large-cap U.S. equities presents very different capital markets considerations than one focused on small-cap stocks, international markets, or less liquid securities.

Because of this variability, many issuers find that capital markets support benefits from a more tailored approach.

Capital Markets and Portfolio Implementation

Another area where capital markets expertise can add meaningful value is in coordinating large portfolio transitions and tax-efficient trading.

When ETFs experience significant inflows or outflows, or when portfolio managers need to reposition holdings, capital markets professionals often help coordinate custom in-kind basket (CIB) trades. These transactions allow portfolio adjustments to occur through the ETF creation and redemption process rather than through traditional market transactions in the open market.

When structured properly, this approach can help reduce trading costs and improve tax efficiency by allowing appreciated securities to leave the portfolio through in-kind redemptions rather than being sold in the open market.

Because these situations are highly dependent on the portfolio manager’s objectives and the characteristics of the underlying securities, they often benefit from close coordination between the capital markets function and the portfolio management team.

Supporting the Entire ETF Organization

Even when issuers work with a white-label platform to launch and maintain their ETFs, many still find value in having a dedicated capital markets representative focused specifically on their products.

A tailored capital markets resource can help coordinate closely with portfolio managers, assist sales teams in understanding ETF trading dynamics, and support compliance and marketing groups that may be newer to the ETF ecosystem.

For portfolio managers accustomed to mutual funds or separate accounts, the ETF structure introduces a different set of tools and considerations. Having someone who understands both the portfolio construction process and the mechanics of ETF trading can help ensure the structure is used as effectively as possible.

Market Makers and the Growing ETF Ecosystem

As the ETF ecosystem continues to expand, another dynamic is becoming increasingly important: the growing demands placed on market makers.

The number of ETFs has grown significantly in recent years, while the number of firms actively providing liquidity has remained relatively concentrated. Market makers must carefully allocate capital and resources across hundreds of products, each with its own trading characteristics and operational requirements.

For smaller or newly launched ETFs, establishing strong relationships within the market-making community can therefore become increasingly important. New issuers often require more coordination and communication during the early stages of a product’s life, particularly when trading patterns are still developing.

A capital markets professional with established relationships among market makers and authorized participants can help facilitate these interactions, ensuring that liquidity providers fully understand the strategy and structure of the ETF being launched.

Internal Teams vs External Specialists

Some larger asset managers choose to build an internal capital markets team as their ETF platform grows. This can make sense for firms planning multiple launches or those that expect ETFs to become a central part of their product lineup.

For firms launching their first ETF, however, hiring a full-time capital markets professional may not yet be practical.

In these situations, some issuers choose to work with experienced ETF professionals on a consulting or contracting basis. This approach allows firms to access specialized expertise during the critical launch and early trading phases without committing to a permanent internal team.

It also allows capital markets support to be tailored specifically to the strategy being brought to market rather than relying on a one-size-fits-all model.

Finding the Right Balance

In practice, the most successful ETF launches often involve a combination of resources: a strong operational platform, engaged market makers and authorized participants, and capital markets expertise that understands how the strategy will interact with the ETF trading ecosystem.

There is no single correct model. But understanding the trade-offs between building internal capabilities and relying on external expertise is an important step for any firm considering entering the ETF market.

As more traditional asset managers explore the ETF wrapper, this decision will likely become an increasingly important part of the launch process.

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.