How To Create Your Own ETF
Starting an ETF
Have you ever wondered how exchange-traded funds (ETFs) are created? If you have the financial resources and investing knowledge, then you can establish your own ETF. If you are a beginner investor, then you may decide that investing in an existing ETF is the better choice.
Whether you are just starting out as an investor or a seasoned financial professional, keep reading to understand what it takes to establish a new ETF.
- Creating your own ETF means that you get to decide how to diversify the fund’s portfolio.
- Starting an exchange-traded fund usually requires significant capital and financial expertise.
- You can pay to have an ETF created and operated for you.
- Beginner investors may choose to invest in existing ETFs instead.
How To Design a New ETF
If you have capital in the six-figure range or more, then you may want to seriously consider designing and launching your own exchange-traded fund. Here are some considerations for the design of your new ETF:
- Asset class: Which asset class—stocks, bonds, or something else—will your ETF hold? Although less common, you can diversify the fund across asset classes.
- Market capitalization: What size companies will the ETF invest in? You can choose to focus the ETF on large-, medium-, or small-cap companies, or diversify across market capitalization sizes. Focusing on large-cap stocks generally requires the most seed capital.
- Market sector: Will your ETF focus on a specific industry, or invest in funds across sectors? You may decide to focus your fund on a market segment with which you have strong expertise.
- Fees: What annual fee, known as the expense ratio, will you charge? Many investors pay close attention to fees, making your ETF’s expense ratio extremely important.
After you design your ETF, the next steps are to launch and operate it. Creating a successful ETF requires expertise in fund management, marketing, and legal compliance, among other specialties.
Another option, as an individual investor, is to create and maintain a DIY-style ETF. You can establish a portfolio of stocks that mirrors an index like the S&P 500, and then buy and sell those stocks to maintain the current weightings of the stocks in the index. This alternative requires time and effort but can be affordable if you use a commission-free trading platform like Robinhood or TD Ameritrade.
ETF Creation Platforms
You may have the financial resources but not the time to start an ETF yourself. You can choose to hire a company to create and operate an ETF for you—all you need to do is to purchase the ETF’s initial investments.
Here are some examples of ETF creation services:
- ETF Managers Group
- Exchange Traded Concepts
- Alpha Architects
Should You Launch Your Own ETF?
You should launch your own ETF as a financial professional if you have the monetary resources and relevant expertise. As an individual investor, you may want to launch an ETF if your goal is to invest in a large number of securities without paying any fees to an investment manager.
Creating an ETF is generally the work of financial professionals, although anyone can start an exchange-traded fund. You may not even need financial expertise if you hire a company to start an ETF for you.
If you have enough money, you can create an ETF that attracts external investors. If you are just investing your personal capital, then you can establish an investment portfolio that functions like an ETF. Pursuing the DIY option requires attention and time to ensure that the allocations in your portfolio continue to match the financial index that the portfolio is intended to track.
For financial professionals, you may want to start an ETF if you clearly understand the opportunities and risks. Maybe you have an idea for an ETF with a unique focus and possess or can raise the necessary capital to bring your ETF idea to fruition. But if you are like most investors, then you probably wish to diversify your portfolio without being required to continuously buy and sell securities. If that’s the case, then purchasing shares in an existing ETF is likely the most suitable choice.