Blog
ETFs Part III: Running an ETF
PINE Advisor Solutions | 19 May 2025
In this final part of our three-part ETF series, we will review what it takes to run an ETF after it has launched. Successful distribution of an ETF can be difficult but is key to its success. Further, the ETF wrapper may introduce the issuer to new concepts and terms such as liquidity and secondary markets. Maintaining an efficient operational structure is a crucial component that can impact the fund's performance and reputation in the market.
This series includes Part I: ETF Basics in our Q4 2024 Newsletter, followed by Part II: Launching an ETF in our Q1 2025 Newsletter.
After successfully launching an ETF, the real work begins. Running an ETF requires expertise across portfolio management, capital markets, regulatory compliance, and distribution strategy to ensure the fund's sustained success.
Operational Adviser Responsibilities
Daily transparency is a hallmark of ETFs, and while issuers can list active non-transparent ETPs, the majority of products disclose their holdings daily. Issuers must generate a Portfolio Composition File (PCF), which is sent to the fund administrator and published via DTC to the street. The PCF allows Authorized Participants (“APs”) to understand the ETF's underlying constituents, enabling them to deliver or receive appropriate securities when fulfilling creation or redemption orders. APs use this information to identify arbitrage opportunities that help maintain the ETF's market price.
When bringing an ETF to market under Rule 6c-11, issuers must adhere to specific regulatory guidelines, particularly around transparency and operational oversight. The rule permits the use of custom baskets—those that differ from the standard published portfolio—but requires that designated individuals or roles be formally identified as responsible for approving such transactions. Issuers must also document how the use of a custom basket serves the best interest of shareholders. Additionally, Rule 6c-11 mandates daily public disclosure of key fund information on the fund’s website, including portfolio holdings, NAV, market price, bid-ask spreads, and historical premium/discount data.
Traditional mutual fund managers often find ETF distribution challenging. Tracking purchases is far more difficult in the ETF space, and sales efforts must adapt accordingly. Successful issuers tend to adopt a wrapper-agnostic approach: focusing on selling investment strategies and allowing advisers to choose the best product format. Compensation models must adapt, as wholesaler compensation based on the direct tracking of sales through financial intermediaries is challenging if not impossible. Firms may implement salary-plus-bonus structures tied to overall platform success, which may be a new approach for wholesalers who are used to tracking their individual success.
Capital Markets and Portfolio Management
Creation and redemption activity can occur either in-kind or via cash. In-kind deliveries, wherein securities are transferred directly, are typically preferred for tax efficiency, though it is always suggested to speak to your own tax professional. Cash orders, on the other hand, require the funds to enter the market and purchase the portfolio securities, potentially exposing it to trading costs and market movement. Managing the mix between cash and in-kind flows is a vital component of optimizing fund performance, as well as ensuring the fund’s compliance with obligations under the SEC’s Liquidity Rule (Rule 22e-4).
Corporate actions such as stock splits, dividends, mergers and acquisitions, and spin-offs must be interpreted and booked accurately within the fund's accounting procedures. Failure to properly handle these events can distort NAV calculations and affect investor confidence. Unlike traditional mutual funds, ETFs cannot be closed to new investors. Therefore, large creation activity can cause a fund to become too big, potentially impacting the liquidity of underlying securities and influencing their prices. Portfolio managers must remain vigilant about market dynamics, particularly during periods of significant capital inflows.
Effective capital markets support is critical for maintaining tight bid/ask spreads and adequate liquidity. Utilizing advanced pricing and valuation technologies becomes even more important when an ETF holds less liquid constituents, such as fixed income or international securities. Maintaining regular, proactive communication with APs and Lead Market Makers (“LMMs”) is crucial to ensure these stakeholders understand the fund's attributes and trading characteristics.
Capital markets teams often play a hybrid role by supporting sales efforts. Activities include waiving creation/redemption fees under strategic circumstances, engaging institutional investors, and describing fund attributes to prospective buyers and financial intermediaries. In practice, portfolio management and capital markets responsibilities can blur. Asset managers with seasoned professionals in both disciplines are typically best positioned to succeed, as collaborative workflows ensure trading efficiency and a positive investor experience.
ETF managers must also understand fund liquidity metrics and monitor bid/ask spreads closely. Spreads may widen due to factors like low trading volume or illiquid underlying securities, potentially affecting investor conviction and trading costs. Order management requires constant attention and immediate responsiveness, with an understanding of fund-specific settlement timelines, often dictated by a fund’s underlying holdings and respective markets, and non-standard processing requirements. With T-1 settlement schedules, generally utilized by international products, order windows may extend until 5:30 PM ET, demanding full-time operational coverage to ensure timely execution and accurate settlement.
New Players
As noted in previous newsletters, APs are typically large banks and financial institutions that operate in the ETF primary market, managing creation/redemption activities either on behalf of clients, for their own inventory needs, or to make the most of arbitrage opportunities between the ETF and its NAV. LMMs post bid and ask spreads, fulfill secondary market orders, and provide liquidity. Their effectiveness directly influences the trading experience for end investors. Building strong relationships with LMMs is fundamental to maintaining tight spreads and a stable market presence.
Choosing the right exchange is a strategic decision that can influence an ETF’s visibility, liquidity, and long-term growth potential. Major listing venues offer competitive advantages including robust market infrastructure, trading technology, and issuer support services. Each exchange has its own approach to market-making oversight, promotional opportunities, and data dissemination, which can affect how the ETF is perceived and traded. Beyond simply providing a listing platform, exchanges often serve as partners in helping issuers engage investors through tools like webinars, research distribution, and marketing initiatives. The selection of an exchange should align with the fund’s asset class, target audience, and broader distribution strategy.
On to the Next…
Finally, a long-term view must be taken: is the focus solely on running a single fund, or are there plans to expand into a broader platform? A cohesive platform strategy allows for cross-selling opportunities and may enhance brand value over time. Whether scaling the offering suite or deepening focus on a flagship product, clear vision and disciplined execution are critical for growth.
In conclusion, managing an ETF post-launch requires not only strong investment management but also a deep understanding of market structure, operational logistics, regulatory compliance and distribution strategy. Success is driven by collaboration, agility, and a commitment to excellence across all facets of fund management.
Reach out to your PINE contact with any questions, and we can provide tailored insights and guidance based on your individual needs.
This series includes Part I: ETF Basics in our Q4 2024 Newsletter, followed by Part II: Launching an ETF in our Q1 2025 Newsletter.
After successfully launching an ETF, the real work begins. Running an ETF requires expertise across portfolio management, capital markets, regulatory compliance, and distribution strategy to ensure the fund's sustained success.
Operational Adviser Responsibilities
Daily transparency is a hallmark of ETFs, and while issuers can list active non-transparent ETPs, the majority of products disclose their holdings daily. Issuers must generate a Portfolio Composition File (PCF), which is sent to the fund administrator and published via DTC to the street. The PCF allows Authorized Participants (“APs”) to understand the ETF's underlying constituents, enabling them to deliver or receive appropriate securities when fulfilling creation or redemption orders. APs use this information to identify arbitrage opportunities that help maintain the ETF's market price.
When bringing an ETF to market under Rule 6c-11, issuers must adhere to specific regulatory guidelines, particularly around transparency and operational oversight. The rule permits the use of custom baskets—those that differ from the standard published portfolio—but requires that designated individuals or roles be formally identified as responsible for approving such transactions. Issuers must also document how the use of a custom basket serves the best interest of shareholders. Additionally, Rule 6c-11 mandates daily public disclosure of key fund information on the fund’s website, including portfolio holdings, NAV, market price, bid-ask spreads, and historical premium/discount data.
Traditional mutual fund managers often find ETF distribution challenging. Tracking purchases is far more difficult in the ETF space, and sales efforts must adapt accordingly. Successful issuers tend to adopt a wrapper-agnostic approach: focusing on selling investment strategies and allowing advisers to choose the best product format. Compensation models must adapt, as wholesaler compensation based on the direct tracking of sales through financial intermediaries is challenging if not impossible. Firms may implement salary-plus-bonus structures tied to overall platform success, which may be a new approach for wholesalers who are used to tracking their individual success.
Capital Markets and Portfolio Management
Creation and redemption activity can occur either in-kind or via cash. In-kind deliveries, wherein securities are transferred directly, are typically preferred for tax efficiency, though it is always suggested to speak to your own tax professional. Cash orders, on the other hand, require the funds to enter the market and purchase the portfolio securities, potentially exposing it to trading costs and market movement. Managing the mix between cash and in-kind flows is a vital component of optimizing fund performance, as well as ensuring the fund’s compliance with obligations under the SEC’s Liquidity Rule (Rule 22e-4).
Corporate actions such as stock splits, dividends, mergers and acquisitions, and spin-offs must be interpreted and booked accurately within the fund's accounting procedures. Failure to properly handle these events can distort NAV calculations and affect investor confidence. Unlike traditional mutual funds, ETFs cannot be closed to new investors. Therefore, large creation activity can cause a fund to become too big, potentially impacting the liquidity of underlying securities and influencing their prices. Portfolio managers must remain vigilant about market dynamics, particularly during periods of significant capital inflows.
Effective capital markets support is critical for maintaining tight bid/ask spreads and adequate liquidity. Utilizing advanced pricing and valuation technologies becomes even more important when an ETF holds less liquid constituents, such as fixed income or international securities. Maintaining regular, proactive communication with APs and Lead Market Makers (“LMMs”) is crucial to ensure these stakeholders understand the fund's attributes and trading characteristics.
Capital markets teams often play a hybrid role by supporting sales efforts. Activities include waiving creation/redemption fees under strategic circumstances, engaging institutional investors, and describing fund attributes to prospective buyers and financial intermediaries. In practice, portfolio management and capital markets responsibilities can blur. Asset managers with seasoned professionals in both disciplines are typically best positioned to succeed, as collaborative workflows ensure trading efficiency and a positive investor experience.
ETF managers must also understand fund liquidity metrics and monitor bid/ask spreads closely. Spreads may widen due to factors like low trading volume or illiquid underlying securities, potentially affecting investor conviction and trading costs. Order management requires constant attention and immediate responsiveness, with an understanding of fund-specific settlement timelines, often dictated by a fund’s underlying holdings and respective markets, and non-standard processing requirements. With T-1 settlement schedules, generally utilized by international products, order windows may extend until 5:30 PM ET, demanding full-time operational coverage to ensure timely execution and accurate settlement.
New Players
As noted in previous newsletters, APs are typically large banks and financial institutions that operate in the ETF primary market, managing creation/redemption activities either on behalf of clients, for their own inventory needs, or to make the most of arbitrage opportunities between the ETF and its NAV. LMMs post bid and ask spreads, fulfill secondary market orders, and provide liquidity. Their effectiveness directly influences the trading experience for end investors. Building strong relationships with LMMs is fundamental to maintaining tight spreads and a stable market presence.
Choosing the right exchange is a strategic decision that can influence an ETF’s visibility, liquidity, and long-term growth potential. Major listing venues offer competitive advantages including robust market infrastructure, trading technology, and issuer support services. Each exchange has its own approach to market-making oversight, promotional opportunities, and data dissemination, which can affect how the ETF is perceived and traded. Beyond simply providing a listing platform, exchanges often serve as partners in helping issuers engage investors through tools like webinars, research distribution, and marketing initiatives. The selection of an exchange should align with the fund’s asset class, target audience, and broader distribution strategy.
On to the Next…
Finally, a long-term view must be taken: is the focus solely on running a single fund, or are there plans to expand into a broader platform? A cohesive platform strategy allows for cross-selling opportunities and may enhance brand value over time. Whether scaling the offering suite or deepening focus on a flagship product, clear vision and disciplined execution are critical for growth.
In conclusion, managing an ETF post-launch requires not only strong investment management but also a deep understanding of market structure, operational logistics, regulatory compliance and distribution strategy. Success is driven by collaboration, agility, and a commitment to excellence across all facets of fund management.
Reach out to your PINE contact with any questions, and we can provide tailored insights and guidance based on your individual needs.