What to Know About ETF Distribution

Your plan is in place, your team is assembled, and your investment objectives are set. You are almost ready to launch your exchange-traded fund. Yet before your fund enters the marketplace, you will need a distribution plan.

Primary market

To maintain a liquid secondary market with tight bid-ask spreads for ETF shareholders, there needs to be a mechanism through which new shares can be created and added to the market or liquidated and removed from the market. This mechanism is called the creation and redemption of shares.

Large financial institutions, called Authorized Participants (APs) place orders with the ETF’s custodian at Net Asset Value (NAV) to create or redeem shares in large units, usually 25,000 or 50,000 shares minimum at a time. Due to the in-kind and primary market nature, an ETF can maintain tax efficiency and allow shares to trade in the secondary market without needing the fund to buy or sell securities in the portfolio.

Legal underwriters for ETF issuers, such as ACA Foreside, engage with APs to execute an Authorized Participant Agreement that sets parameters for how creation and redemption orders will be placed and processed. The AP Agreements also have an Authorized Persons Annex where the AP firm designates authorized individuals to place trades within the ETFs that fall under the ETF to which the agreement pertains. Once the AP Agreement is fully executed, it is provided to the custodian of the ETF who then opens access in their order management system for the traders listed in the Annex to place creation and redemption orders in the ETF. The legal underwriter of the ETF reviews creation and redemption orders as they come into the custodian’s system. Generally, they are confirming the order attributes conform to the procedures described in the fund’s offering documents and AP Agreements.

To maintain a liquid secondary market with tight bid-ask spreads, it is strongly recommended a new ETF complex have at least 3 to 5 APs signed up ahead of the initial ETF launch. A healthy distribution network benchmark after a year of operation is to have 10 APs signed up to place creation and redemption orders.  With over 40 APs in the industry, some are specialized in specific mandates (i.e., global, domestic equity, fixed income, etc.). Knowing this information and doing initial research will help narrow down which APs will be the right fit for your firm.

ETF distributors and custodians work closely with the AP community and have relationships that ETF firms can leverage. Having the right contacts can significantly assist with a smooth fund launch and a successful path forward for your funds.

When communicating and meeting with APs, be prepared to discuss your product in detail including overall product strategy (i.e., what is your value proposition). Additionally, APs will want to know other essential operational information, such as how you expect your product to trade, liquidity requirements, and fees (overall expected fund expenses and AP transaction fees).

The trade desk at the AP will want to know what the underlying securities in the basket are to ensure there are no liquidity concerns. Additionally, APs will be interested in your sales and marketing plan and how you will plan on raising assets, including how you are seeding your product. Being prepared with all these answers will alleviate concerns APs may have when it comes to the decision-making process of entering into an agreement with your firm. It is important the capital markets team of an issuer also build strong relationships with the APs signed up in their ETFs.

Secondary market

Initial focus by firms entering the ETF space is around navigating the primary market with new roles, players, and an ecosystem to grasp. While primarily a critical focus area, firms also need to ensure they are seeing the full perspective of adding the wrapper to their client solution tool-kit. The secondary market is where end investors will buy and sell your ETF and where dedication from the organization to resources, such as time and economics, will provide the foundation to successfully build upon a great idea.

Insight into the overall marketplace, as well as an understanding of how to best navigate the intermediary landscape, provides the foundation which is essential for developing an effective distribution approach for your product.

Understanding how your offering is unique and outlining the competitive universe will assist in aligning your fund and capabilities in the context of the broader market. The critical next step will be to determine where the overlap exists between your unique strategy and the opportunities available in the marketplace. In short, identifying your target audience. Focusing on this overlap or target audience will allow you to create a customized approach to follow and penetrate the ever-evolving retail marketplace.

In formulating your approach, it is helpful to establish a distribution framework to follow with the launch of your product. The process for establishing the framework will occur in three phases:

The first phase in your analysis will establish the initial firms to focus on. The latter two phases will be ongoing engagement and the framework build to support the expansion of your distribution footprint. The resulting roadmap, (details outlined below), will be a process of identifying, engaging, and incorporating new partners into your distribution footprint. 

Initial access for your ETFs will be through the multi-channel supermarkets or custodial platforms. These intermediaries serve the needs of direct individual investors or financial institutions, such as RIAs or correspondent broker-dealers, acting on behalf of their clients with comprehensive investment platforms. The largest supermarket platforms are Fidelity, Schwab, TD Ameritrade, and Pershing. (Pershing does not support direct individual investor access). These platforms generally allow for an ETF to be available upon listing. Although having an open architecture, there can still be restrictions or additional hurdles for some ETF product types or structures. A few examples include the need for an agreement to be in place prior to making a semi/non-transparent ETF wrapper available at Schwab, or restrictions on access to levered, cryptocurrency, or futures-based types of products. 

Once you have insight into your initial avenues for access, it is necessary to engage with those intermediaries and their clients. This will come in the form of expanding the adoption of the fund through proactive sales and marketing efforts to your client / adviser base, and to navigate centers of influence at the intermediary level.

Firms can engage with intermediaries and their clients in a few different ways. Digital marketing and sales efforts, such as digital advertising (Google, social media, online resources) and direct email campaigns, have all seen an uptick since the COVID-19 pandemic and are not looking to go away anytime soon. Another way of engagement is at the intermediary’s home office level by sponsoring a conference or webinar, or engaging research teams on your quarterly performance. Leveraging database tools to gain transparency into the firms available to many of the underlying RIAs and correspondent firm clients of those intermediaries will provide insights into who is buying or interested in your product. 

In addition to a focused effort on deepening relationships at these current intermediaries, it will also be necessary to continually review and proactively expand the breadth of your intermediary footprint by prioritizing the selective onboarding on additional platforms. As your product reaches scale in assets and time in the market with a longer track record, it will be necessary to focus on the 3 C’s – creating, cataloging, and communicating demand to expand your footprint with additional intermediaries. With the growth of your assets and your track record, make sure you also review additional opportunities on existing platforms such as engagement with research teams or home office opportunities (sponsorship/partnerships) as also stated in the engage section above.

As the ETF product marketplace matures, access points or requirements are becoming more robust, which can limit your adoption. Building awareness among these investor bases will require a formal distribution approach incorporating a unified team effort across marketing, sales, national accounts, and data integration. You can take advantage of momentum in building your ETF by balancing a traditional and an innovative approach. 

Factors currently reshaping distribution

Market catalysts, such as recent changes in regulations with the ETF Rule, commission-free investor access, and the launch of portfolio shielding wrappers with non- and semi-transparent options, are causing more asset managers to consider entering the space, increasing competition. Active ETF product development has been a continued focus for many issuers, as entrants into the space grow adoption. There has been a slower embracement at the broker-dealer level, as they are continuing to evaluate enhanced support and due diligence needs of both transparent and semi-transparent wrappers. It is no longer “build it and they will come.” Market need and demand for your strategy in an ETF wrapper is what drives this journey.

Ready to launch an ETF?

If you too are looking to launch an ETF, then download our guide below. We will walk you through everything you need to know to get started, including the differences between ETFs and other product offerings, startup costs, necessary service providers, and how to gain assets via distribution.

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How we help

If you are ready to launch an ETF, then contact us today to get started. Year-over-year, the most well-known global wealth and asset managers continue to choose ACA Foreside to help expand and support their product line up of ETFs. In 2023, our specialists partnered with more than half of the ETF launches in the U.S., and we support 1,000+ ETFs distributed across 275 managers. 

We work with asset management firms throughout the world to facilitate compliance and product distribution through legal underwriting, registered rep licensing and chaperoning, and DTCC/NSCC fund sponsorship. We have experience working with all types of pooled investment vehicles, such as traditional mutual funds, ETFs, alternative products, closed-end interval funds, and private placements.

Once launched, we can further support you with our broad range of advisory, managed services, and regulatory technology solutions, to help you grow and protect your business, while also addressing your compliance, ESG, investment performance, and cybersecurity challenges.