At The Money: Building an ETF

Summary of At The Money: Building an ETF

by Bloomberg

14m•January 28, 2026
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Overview of At The Money: Building an ETF

This episode of Bloomberg’s At The Money (host Barry Ritholtz) interviews Wes Gray (ETF Architect / Alpha Architect) on how to create and launch an exchange-traded fund (ETF). The conversation walks through feasibility criteria, timeline, costs, seeding methods, structural trade‑offs (index vs active), common pitfalls, liquidity mechanics, and where new managers should position their strategies to succeed.

Key takeaways

  • Core success factors: low fees, sufficient seed capital, and passionate distribution effort. Competing against giants (BlackRock, Vanguard, State Street) requires a strong story and relentless selling.
  • Realistic timeline: a streamlined launch can take ~4 months from letter of intent; practical range can extend to years depending on sponsor issues.
  • Seed capital expectations: historic minimums were ~$5M; current practical minimums are ~$25M and may be moving toward ~$50M to signal credibility.
  • Costs: startup (soup-to-nuts) roughly ~$50K; ongoing operating/administrative costs about ~$200K/year on average.
  • Break-even math: at 1.0% fee, break-even ≈ $20M AUM; at 0.20% fee, break-even ≈ $100M AUM.
  • Seeding methods: cash purchases or in‑kind/property transfers (Section 351) of existing public securities.
  • Active vs index: Gray generally recommends active ETFs—even for systematic strategies—for operational flexibility and lower third‑party index overhead.
  • Liquidity: most ETFs rely on primary liquidity (market‑makers creating/redeeming shares). Only a few ETFs (SPY, QQQ, etc.) trade via secondary liquidity with tight spreads and deep natural market depth.
  • When an ETF is not right: strategies requiring daily opacity, limited capacity (microcap/penny stock strategies), or those that need to be closed/capacity‑constrained are better as SMAs, trusts, or mutual funds.
  • Best niche to pursue: boutique, specialized, or complex strategies that large passive providers can’t or won’t scale. Don’t attempt to compete with trillion‑dollar-scale beta providers.

Timeline & process

  • Typical fast launch: ~4 months (if sponsors are ready and checklist/processes are automated).
  • Longer outcomes: 4 months → multiple years if internal sponsor issues arise (raising seed capital, approvals, legal).
  • Practical launch checklist (high level):
    • Sign letter of intent with platform/provider
    • Finalize strategy rules / prospectus language
    • Legal, compliance, audit, and administrator setup
    • Listing on an exchange
    • Seeding (cash or in‑kind)
    • Market‑maker onboarding and distribution launch
    • Ongoing marketing and advisor outreach

Costs & economics

  • One‑time startup: roughly $50K (varies).
  • Ongoing: ~ $200K/year (admin, legal, audit, transfer agent, compliance, listing fees, market maker support, operations).
  • Fee vs AUM break-even examples:
    • 100 bps → break-even ~ $20M
    • 20 bps → break-even ~ $100M
  • Higher perceived seed AUM (e.g., $25–50M) signals credibility and helps attract flows.

Seeding options

  • Cash seed: investors buy shares through brokers after launch.
  • In‑kind/property seed: contribute public securities to ETF (tax‑efficient using Section 351) that constitute the portfolio.

Structure: index vs active

  • Gray’s view: prefer active ETFs even for systematic strategies because:
    • Avoid third‑party index agent fees/complexity.
    • Gain operational/flexibility advantages (e.g., delay rebalances around market stress).
    • Fewer compliance/paperwork constraints compared to hard‑tracked indices.

Liquidity & market behavior

  • Two liquidity types:
    • Liquidity diamonds: massively traded ETFs where secondary market has ample natural counterparties (e.g., SPY, QQQ).
    • Normal ETFs: rely on primary liquidity via authorized participants (APs)/market makers; spreads reflect cost to assemble or hedge underlying basket.
  • Underlying basket liquidity determines quoted spreads—illiquid holdings → wide spreads to end investors.

Red flags / strategies to avoid in ETF wrapper

  • Highly leveraged, inverse, or opaque swap‑based products with large embedded costs and low transparency.
  • Products that retail investors can easily misuse or misunderstand.
  • Strategies needing daily secrecy (ETFs require transparency) or where capacity must be strictly limited (ETF can’t be “closed” easily).
  • Microcap/penny stock strategies where AUM scale would destroy strategy performance.

Where to compete (strategic advice)

  • Focus on niche, boutique offerings that require expertise or are not scalable to billions (areas Vanguard/iShares won’t serve well).
  • Offer differentiated complexity, specialty exposures, or hard‑to-manufacture strategies.
  • Avoid trying to replicate broad market beta at scale—those are monopolized by big passive providers.

Notable quotes

  • “It’s going to come down to low fees, capital and passion.”
  • “You’ve got to be around for at least three to five years to tell your story.”
  • “If you can put a trillion dollars in your strategy without any breaks, it’s probably not going to work because Vanguard’s already doing it.”
  • “The back end of this is a total dumpster fire”—referring to operational/administrative complexity.

Quick action checklist for an analyst/manager who wants to launch an ETF

  • Validate product-market fit: is this a niche Vanguard can’t scale? Will investors pay for it?
  • Secure distribution plan and a passionate seller (or team) to drum up flows.
  • Line up seed capital target: aim for ≥ $25M (consider raising to $50M if possible).
  • Choose provider/platform (white‑label turnkey) that handles legal, ops, compliance, transfer agent, market makers.
  • Decide seeding method: cash vs in‑kind (Section 351) and prepare contribution paperwork.
  • Budget for startup (~$50K) plus ongoing ~$200K/year; set realistic fee and AUM break-even.
  • Decide active vs index architecture—consider active to preserve flexibility.
  • Prepare marketing & adviser outreach to achieve multi‑year distribution.

Bottom line

Launching an ETF is operationally feasible but capital‑intensive and competitive. Success hinges on credible seed capital, low fees, strong distribution/passion, and finding a niche that large passive providers aren’t serving. A turnkey provider can remove much of the operational complexity, but sponsors must be ready to fund and sell the product for several years to build sustainable assets under management.