Contrary to what you might have been hearing at holiday parties, “starting your own ETF” is easier said than done. But for many who wonder aloud about becoming the next Wall Street wonder, there are actually a few different answers to that loaded question.
Next time someone corners you next to the spiced cider and says, “Hey, I’ve got some unique ideas about investing. Do you think I should start my own ETF,” be sure to respond, “Well if by that you mean starting and marketing your own exchange-traded fund on the open market, I’m sure you know that after a 2 or 3 year wait for SEC licensing, you’ll need to have at least $250,000 on hand to cover fees, startup costs and regulatory expenses. You know that, right?”
This is a very effective, and honest, way to get rid of those know-it-all financial nerds who are as common at holiday get-togethers as bacteria in a clogged drainpipe. Sadly, every now and again, the person will have a response to your response. This is a bad sign and means you’ll need to listen to the predictable, “No, I’m not gonna start from scratch. I just hooked up with one of those white-labeling firms. They do all the legwork and SEC filing. My only responsibility is to run the thing and do some marketing.”
Now you can move in for the kill. Say, “Oh sure. That’s good news because the white-label route will reduce your up-front expenses to a mere $100,000, which means you’ll be able to spend the money you saved on hiring a marketing firm. With luck, you might show a profit within 3 years. How very interesting. Oh, my pacemaker battery just buzzed its low alert. I’d better be going.”
Sad but True
That hypothetical conversation is on target with its facts about ETF costs and the hurdles that individuals, and small companies, face when getting an actual exchange-traded fund off the ground. It’s a huge undertaking, and can mean a life commitment of work and financial obligations. The truth is that individuals who attempt to start their own ETFs are like those people who try to build a rocket to the moon in their garage.
Fortunately, for everyday investors who want to create their own custom-made ETF, just for their own use, the task is simple. Several companies have sprung up that let ordinary consumers design an ETF from thousands of available stocks.
Another Way to “Create Your Own ETF”
Companies like Motif Investing and Folio Investing offer a really interesting service for investing enthusiasts. For a small yearly or monthly fee, you can build a “designer ETF” from thousands of listed securities. If you like to put your money into contrarian stocks, that zig when Wall Street zags, you simply choose from the menu, place those stocks into your portfolio, and the platform makes them into an ETF.
In most cases, you can choose as few as two or as many as 30 components of your custom-made investment vehicle, plus you can choose to make it available to other investors on the platform or keep it just to yourself. The most useful function of the program is that you can assign whatever weights you want to each security in the portfolio.
Right now, two companies dominate this new niche, but others are entering at a rapid pace. For people who like to design their own ETFs or choose from a massive array of custom-made ones, Motif and Folio are in front of the curve.
Officially known as Motif Investing, the company is one of the two main players in this new market niche. They offer simple, inexpensive ways to construct ETFs from scratch, or opt for one of their pre-built ones. Neither yours nor theirs is actually an “ETF,” legally speaking, because it’s not available on any of the securities exchanges. However, other than that caveat, the investment vehicle acts very much the way a “real” ETF does. You can even choose one of Motif’s ETFs and tweak it to your liking.
Investors on the platform can decide on holdings, weights assigned to each stock, and more. And just as you can do with a traditional ETF, you can purchase as much or as little as you desire.
Motif offers more than 115 of their own specialized ETF-like products, all of which are comprised of about 30 different securities. Some focus on the real estate market, young tech firms, energy, or other specialized niches of the investing world. Even if you choose one of their products, you can change the weightings and add or delete particular holdings whenever you want to.
Every pre-set ETF has a chat room where enthusiasts can talk up a storm about why they love or don’t love the holdings. There’s a flat fee of $9.95 whenever you purchase a Motif ETF. If you want to sell or buy just one of the stocks within an ETF, that costs $4.95. There are no management fees ever, and the platform has “live agents” who are ready to answer user questions at any time.
Folio Investing is similar to Motif in many ways, but has its own way of doing certain things. The platform offers “ready-to-go folios,” which number more than 100. Each one is constructed to specifically use a strategy for its market niche or segment. Every once in a while, Folio will tweak the ETFs but they always inform investors when they do so. As an investor, you can build your own ETF that contains as many as 100 stocks, or simply purchase one of the pre-designed offerings. They offer unlimited trades for $29 per month and a few other arrangements for different investing styles.
Doing ETFs the Right Way
ETFs have been one of the darlings of the financial world since they were introduced in 1989. Investors are now flocking to the customization idea that companies like Motif and Folio are offering. With most individual stock market investing taking place online, the idea of customization will almost certainly continue to draw big crowds, and plenty of customers.
Starting our own ETF doesn’t have to be a big deal, as long as you don’t want to go the corporate route and file paperwork with the SEC, spend hundreds of thousands of dollars, and wait for three years to get approval.
Joining an online platform like Folio or Motif is a much easier way to design your own investment package and trade it just as if it were an ETF. That beats red tape and bureaucracy every time.