How to Start Your Own ETF

your own ETF

If you plan on investing a large chunk of money in a particular basket of stocks or bonds anyways, why not create an exchange traded fund (ETF) and make money by having other investors invest alongside you?  If you get enough outside money invested in your ETF, you could possibly turn your passive activity of investing in some index into a profit-generating endeavor.  And if an ETF is something you want to start, there are certainly companies out there like ETF Managers Group, Exchange Traded Concepts, and Canvas who are there to help you.  It all seems logical, but first a few disclaimers.

You Need to Have A Lot of Your Own Money

The first caveat is that you have to have a large amount of money for this to make sense. The first year cost just to set up a single ETF will be at least $300,000 (registration costs, legal fees, etc.).  You also need to seed the ETF with at least $2.5 million and probably more like $5 million.  Even at $5 million, $300,000 is like paying a 6% expense ratio (obscenely high). To get that down to even 1%, you would need to bring on $30,000,000 in money (either your own money or outside investment).  In order to do that, you need to be extremely wealthy (like you just sold your business for a couple hundred million), or be confident that you can pull in that kind of money.  Someone who is a very successful financial advisor with very loyal clients might fit that bill, as would someone who has name recognition on par with a celebrity.

You Need a Unique Idea

If you want anyone to invest with you, you need to have an idea that outside investors can’t just get much cheaper elsewhere.  After all, you can invest with ETF providers like Vanguard, Fidelity, and Schwab at very low expense ratios (<0.2%) when it comes to something generic like an S&P 500 index ETF, a FTSE Emerging Markets ETF, or a Total Bond Market ETF.  The independent funds that have been successful have been based off of a niche that the big boys hadn’t touched yet.  The classic example is Pure Funds Cyber Security ETF (NYSE ARCA: HACK) which was designed to index companies that sell products or services that defend against hacking and increase cyber security.

You Need to be Passionate About that Strategy or Niche

You are tying up a large amount of money in niche that is narrow relative to the total stock market.  It better be something that you seriously want to invest in and can convince others to follow.  If there is not a compelling reason to invest in, for instance, foreign silver mining companies, how are you going to convince others to invest alongside you?  On the other hand, someone that is passionate about indexing companies based on their profit per employee, and being able to convince others of the merits of that strategy, is far likelier to succeed.  From an individual standpoint, its probably far safer to be invested in S&P 500-type companies like Google, JPMorgan Chase, and Apple, albeit at a different weighting than the market capitalization-weighted S&P 500, then it is to be invested so heavily in small cap companies in a hyper-focused niche.

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