Stevens & Malinowski

So ETC, we are the very first white label ETF issuer in the world to our knowledge. We handle everything that somebody might need to launch an ETF. So we offer a full turnkey platform where we handle all the legal and regulatory work. We build custom websites, handle all the portfolio management, of course, all the regulatory filings. And for folks who don't need all of that, we also do those services individually. So we actually act as sub-advisor for quite a few ETFs out in the marketplace, handling their portfolio management work for them, but also can offer marketing services and custom websites and everything somebody might need. We've been around about 13 years at this point.

Well, we are actually here live at the Ultimus Client Summit. And I met one of your partners here, Rich. And so, Rich, why don't I give you the opportunity to give your background and say hello to everybody and kind of where you fit in over at ETC.

Sure, Brad. Rich Malinowski. I'm currently ETC's general counsel. With Garrett and our lead portfolio manager, we're also the executive committee of the company and run the firm and the business. My background, so I've been in the asset management space for about 18 years now, primarily on the legal side the entire time. So I've been with a number of service providers through the years, started as a paralegal and migrated to attorney, and here I am.

So, Rich, what do you think is kind of one of the major differentiators that ETC offers? now we're seeing kind of a boom of white labelers out there as the ETF industry has really started to ramp up. So what do you think one of the key things that you guys are super proud of over at ETC kind of differentiates you guys from the rest?

From our perspective, I think it's a combination of experience and service. As Garrett mentioned, the firm is the first one to do this. the ETF industry overall is still fairly young, so I think having a length of track record is important, and just having the overall experience and seeing what others have done and getting a feel of where things might play out if you try to launch a particular type of ETF. And then where we place a lot of emphasis is on service and quality. We strive for a qualitative experience for the clients. When we say full service and turnkey, we mean it. We try to do everything possible to improve the client experience and make sure that we can guarantee the best outcome for them that we can.

So, Garrett, you and I were talking prior, and you had mentioned, you're starting to see this unique trend of advisors starting to kind of launch their own ETFs rather than, the traditional issuer having to build a product that you think the advisor is going to want and adopt. So, what are you seeing on that side of the fence? And, why would advisors want to be launching their own product?

Yeah, so it's a great tool for them. if you think back to the beginning of the industry, it was really index-based products, and it was really just, the massive issuers. And so what, our business has done is we've really kind of democratized this whole ETF space to make it easy for somebody to launch funds. We have launched funds for some of the largest financial services companies on earth, and we have clients that are a one-person shop, and we can work with everybody in between. This, the newest, kind of phenomenon that we're seeing, and it makes all the sense in the world, is that, a wealth management firm can launch their own product based on an existing strategy that they run,

So just out of curiosity, because I haven't, I haven't been following this as closely as you have, obviously, but are they naming their ETFs after their firm? Are they giving them a unique name? I guess visually or optically, how do these things look when they come out?

Yeah, so they do. They'll put their name on it. They'll put the firm name on it and name it the strategy that they may have, and they may be marketing in a different wrapper. But it's a great marketing tool for their firm. And ETFs being so publicly traded, you can pull them up on Google or Yahoo Finance in any way that a retail investor might see it. So it gives your firm a lot of visibility and credibility to have this publicly traded product

Out there. Yeah, no, that's great. And I think that the other thing that we've been seeing in the space, or at least hearing in the space, this might be a question for Rich, is, are we seeing any more movement in this mutual fund conversion space? I'm hearing it might be a couple of years now. Have you heard any updates as far as what the SEC is looking at, or what's going on with this conversion or ETF share class?

Right. So back when I was with Ultimus, we did our first mutual fund conversion about three years ago now. And it was quite a process. Definitely a learning experience. It got done, successfully converted a mutual fund with multiple share classes, consolidated all of that, moved it over, and now it's an exchange traded product. I think the trend has slowed down, mostly as a lot of the intermediaries and gatekeepers don't seem to be fans of it. At the same time, there's still questions about who's holding the products and how will they hold them after a conversion that leave some questions unanswered. And then you've got all of the recent share class applications with the SEC to copy the Vanguard model and offer either an ETF share class of a mutual fund or a mutual fund share

So would you mention the gatekeeper? Are you talking about the custodians?

Yeah, the custodians, ERA platforms, basically the predominant place where mutual fund shares are held and sold right now.

And that's, I'm assuming, has to do with money? Probably.

Salesperson compensation is, I'm sure, a concern to someone.

Yeah, I would think so too. But well, so we're, like I said, we're here at Altimus. There's a lot of talk about ETFs. We're talking about a number of things. So look, I know this is a hard question, but what do you think is next? Like we've had this wave of derivative and defined outcome products recently hit the market in a big way. We've seen a ton of thematics. We've seen, we're now seeing, levered single stock, whether that's inverse or, to the upside. So again, difficult question. Neither of you have a single ball or a crystal ball, but what do you think could be really next

We could see? it's tough to predict the future, but I think the unpredictability is probably one of the great features of the ETF landscape. Because an ETF issuer can bring anything to market to meet customer demand. And we've seen this with wave after wave. We've seen the thematics. We've seen the option products now. We've seen ESG. these are trends that come. And I think the industry is definitely meeting customer demand. With that said, I have no idea what's going to come down next on the pike. But at the same time, whenever that idea comes up, I'm fairly certain that the industry is going to be pretty quick to respond to it.

Garrett, do you have any ideas around that?

What we're seeing is certainly the trend is more towards active at this point. I think 75% or something of new funds being launched are active at this point rather than the index-based stuff. This industry is great at taking a good idea and beating it to death. And, I think the themes have largely been covered at this point. As soon as I say that, someone will call us with a new idea that nobody's done yet. But, you can only kind of slice and dice. Some of the index is so thin. And so I think this move toward active is really just starting to ramp up. When you compare the assets, obviously, in the ETF world to the mutual fund world, we

Will you walk me right into my next question, which is, we know that the active, actively managed ETF space is growing significantly. Like, how do you see the balance now between kind of passive products and active? At least what I'm viewing, I have a little bit of a lens in the RI space, is you're seeing them, you're seeing advisors build traditional passive model portfolios, but they're bolting on some of these actives for whatever reason, whether it's to help dampen volatility, maybe it's to juice returns. Like, what are you hearing, seeing, and, where do you think the balance is now as, these actively managed ETFs are really hitting the market? Yeah.

I think for a long time we saw a lot of that kind of core and satellite approach. And I think now, this move towards active is where you have an advisor who can take that kind of core and active approach that they were doing and just putting the whole thing into an ETF. ETF. So, you're getting their active stock selection, you're getting their, sector allocations all in one vehicle, rather than having to own a bunch of different ETFs or a bunch of stocks and some ETFs as that advisor might have been doing before for their client, they can put it in one. And it makes it a lot easier for them operationally just to have one product to trade for a client,

So I'm just trying to think from an RIA's perspective, more from the client's perspective, like optically, how do you, I would have a hard time seeing a client being, I get the approach, I get why it's operationally better, I get why it's more tax efficient, I get why it's beneficial, but does it just come down to education to the client to say, hey, look, there's a lot, you have a highly diversified portfolio and we're doing it all

In one wrapper? It does. Yeah, it does that, but you're also, especially, again, back to the tax benefits, you can tell them that, here were the capital gains, that you got last year in this wrapper and let's put it into an ETF and you're not going to have that. I think for all of the products that we're running, I don't know that we paid any substantial capital gains taxes out in the last year or two for these funds. So, it's, it's been a, it's a lot of education to advisors and then for them to their clients to let them know why, this is a better approach. But what you're seeing is that the advisor can take their taxable money and put it in the

So as, as far as like kind of next waves go, I think, we've heard a lot about AI and machine learning. Obviously you've got the, the biggest performing and best performing stocks in the world in that space. Are you guys starting to get calls from managers that have, machine learning or AI strategies that they want to employ inside of an ETF? Have you started to see that wave start?

Yeah, for sure. Actually, we have a full suite of products already that are AI done. So, they, there's a technology company in South Korea actually called Kraft that we've been working with for a long time and we've had products for them for several years and they're completely, all security selection is done by artificial intelligence. And it's been, it's been great to watch. And we have more and more of those conversations with people who are, either utilizing AI in their process or in this case, AI is running the whole thing. And it's definitely here to stay.

So let's, let's flip on to a different part of the ETF space, which is kind of the growth of semi-transparent and non-transparent ETFs. The nice thing about ETFs is you generally can see what's inside of them, but this is, so do you think this is going to start to gain broader acceptance among investors? And I think too, I'm starting to hear, how can we get private equity or private equity-like products inside of ETFs as well? And I would assume those would be, pretty semi or non-transparent. So how do you view the growth or how do we gain broader acceptance among investors with these types of products?

I think that it, I think investors and advisors and the, and the people bringing those are, are accepting them. I think there's a lot of operational nuance to the, to the non-transparent or semi-transparent. You have the whole market making community. You have gatekeepers at various wire houses and things who are maybe less inclined to, to be in favor of the non-transparent. It's harder for them in a lot of cases, understandably. And so I think that is what has slowed kind of the acceptance of, of the non-transparent and semi-transparent. like you said, the benefit of ETFs for so long has been transparency. And that's kind of what people think of when, when they think of this.

So last kind of question about, the ETF market and the ETF industry, we, it's been such an explosion, right? Do you think we're at the beginning? Do you think we're at the middle? does it slow down? Are we just going to continue to see, product launches after product launches year over year? the growth, I forget how many product launches there were last year, but I believe it like Nisey broke the record for, for launches. So where do you think we are in the cycle of actually getting product to market or are we not even close to done? I think we're not close to done.

I think the industry is maturing, right? I think that, we always talk about it. And when we talk with people about kind of the early days of the internet, right? So this is, is not the very first days of it. Everyone, has a computer, right? So it's not, the, the very beginning of the ETF industry anymore. Um, but it's still early innings. Um, there, there's a lot of innovation yet to come. There's a lot of acceptance and uptake that will, will be happening over time. But I think that there's still a really long ways to go. Yeah.

So I kind of want to just pivot for a minute and take some time whenever I have guys like you on who see a ton of, issuers and managers and people entering the space, like, what advice would you have for them as they kind of sit around and think about whether or not they're ready to launch a product? They're getting to that point, a, uh, who are you talking out of launching product and why, and, and kind of be, what are they, what should their expectations be? once they get a product to market, it's out there, the first, six months and first year that product hits market.

Right. So first and foremost, and I got to wear my legal hat for this, but it's do your diligence, right? You, you're getting into a new business and you need to have a pretty good understanding of what you're getting into. Um, that's just a general comment. Um, specifically, I think what it's not that you want to discourage anyone, but you, you've got to manage expectations too. I think in some cases, and, and particularly with more of, of folks that are launching with something that's really in vogue and popular at the moment is that they're going to register launch and, billions of dollars are going to flow in. And there, and this is just a gem of an idea.

Well, in that, finesse it and work it like, Garrett, what do you think people need to be doing, on a daily basis in order to make sure that they're not going to be exiting the ETF business in that first 12 or 18 months? We, everybody sitting at this table knows it's not cheap to run an ETF. Um, so, what do they need to be doing to make sure they keep the lights on and this is a profitable endeavor endeavor for them? Yeah.

Well, I think the biggest thing that, that we're seeing and that we talked to people about and, and to Rich's point, that this is a change is to try and make sure that when you bring the fund to market, you bring it with some assets. I think the days of launching a fund with, a couple hundred thousand dollars in it and it grows to a billion, those days are, those products are fewer and far between than they used to be. Unless it's Bitcoin. Unless it's Bitcoin. Occasionally you, you get one that catches fire and just blows up and takes off, but that's, that's not the norm the way it used to be. And, um, we, we hear a lot of different ideas when we talk to people, uh, some are better

Trying to have some assets when you launch. Yeah. I think it's important. I talked to people who are considering launching an ETF. Um, they just come to pick my brain sometimes and ask how my experience was. And I said, well, where are you going to get the first, 30 million? And they're like, well, we've got, two or three from friends and family. And I'm like, well, that's not, that's not going to work. It's not going to cut it. And are you okay with, with stroke and checks to, to keep this thing alive in hopes of it? So I'm going to ask a selfish question because I get to sit with two people that have been in the industry for a very long time.

So this is where it's important to talk about the, the relationships that make your product run, right? It's not just you. It's not just one or two of you at your shop, right? You have bigger firms behind you. You have, your administrator, your accountant, your auditors, your, the funds distributor. These are very big firms who've been doing this for a very long time. Give them that comfort level that this is not just a, a one or two product shop. You have a lot of infrastructure behind you to run this thing correctly. Number one. But then it's really about telling your story and, having the ability to, when you go to the big wire houses and try and get in the door, one of the things that

Well, guys, I really appreciate both your time. I, it's always great to get an update on what's going on in the industry. It's always good to see, the both of you. And before I let you go there, where can people learn more about Exchange Traded Concepts?

Our website, exchangetradedconcepts.com is the best place. You can, you can contact us right through the website. We have on Twitter, I think we're at ETC ETF, posting content on there pretty regularly these days as well. So we'd love to hear from anybody who has questions.

Well, again, Rich and Gary, thank you so much. Thanks, Brad. Bye.