The ETF universe has exploded in popularity in the past decade, and increasing numbers of independent ETF issuers are joining the fray with unique new products.
Springer Harris, head of ETF solutions at Teucrium, joins WealthChannel’s Andy Hagans to discuss how independent managers can launch their own ETF.
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Episode Highlights
- An overview of the current ETF market, including the high volume of alternative ETF launches.
- Details on how Teucrium helps new issuers get ETFs to market (and why this process is easier and less expensive than it was 15 years ago).
- The three phases of an ETF launch, and the most important steps in each phase.
- The challenges that ETF issuers face when marketing their funds (and potential solutions to these challenges).
- Springer’s thoughts on the most effective forms of marketing for ETF issuers (including which strategies that have succeeded for Teucrium in the past).
Featured On This Episode
- Inside The Agriculture ETF Revolution (The Alternative Investment Podcast)
- Teucrium ETF Solutions (Teucrium)
Today’s Guest: Springer Harris, Teucrium
- Teucrium – Official Website
- Teucrium ETFs on LinkedIn
- Teucrium ETFs on Twitter
- Springer Harris on LinkedIn
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
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Show Transcript
Andy: Welcome to “The Alternative Investment Podcast.” I’m Andy Hagans, and today we’re talking about how to launch your own ETF. If you’re listening to this, it may never even occur to you that you could launch your own ETF but actually, now you can. And joining me today is Springer Harris, head of ETF solutions at Teucrium. Springer, welcome to the show.
Springer: Thanks for having me, Andy. Appreciate it.
Andy: And I do think this is a super intriguing topic because increasingly, when I bring sponsors on the show or when I’m looking at different sponsors, more and more I’m finding that they’re…I don’t want to say wrapper-agnostic, like, obviously, different sponsors will often specialize in certain wrappers. But an increasing number of asset managers and sponsors will have a strategy or multiple strategies that they release under multiple product wrappers. So, I don’t know, maybe there’s a trend of, you know, ‘I may have a private fund but now I’ll have a private REIT,” or maybe a publicly traded REIT or now I’ll have an ETF.
So, it’s just really interesting to me, that a lot of the friction is being removed, you know, from some of these product wrappers, and I know Teucrium is a big part of that in the ETF space. But why don’t we step back and just talk about alternative ETFs, ETF launches? It seems like there’s been a tremendous amount of activity with ETF launches and especially alternative ETFs in the past 12 months. Is that the case, Springer?
Springer: It is, yeah. You know, thank you for having me on the podcast. You have a great podcast and, you know, I’ve been working in alts my entire career, so this is a space that is generally not focused on as much as it should be and it’s where I’ve dedicated my entire career in finance. And so, it’s really exciting to be here on your podcast and so thank you for asking me on coming on. The ETF industry is definitely in a boom stage. In 2022, we had a record number of ETF launches. There were about 450 new ETFs that launched in 2022. And the thing that I think you’ll find most interesting is 20% of those were considered alts.
So, when I pull that up on my Bloomberg, I look at what came out in 2022, put it down into its sector, 20% are going to fall into the alternative space. Those might be managed futures, they might be commodities based, they might be single-stock ETFs, single-stock ETFs were a huge focus in 2022, as well as cryptocurrencies, I’m sure as you’re aware. So, there’s a lot of managers that do want to use the ETF as a way to bring their investment strategy to market. Now, I will say that 2022 was also a very healthy year for fund closures. There was about a three-to-one ratio. So, for every three ETFs that launched, one closed.
Andy: That sounds about right. I mean, Springer, that sounds about…just intuitively, it seems like…
Springer: It’s a healthy ratio, I think it’s a really healthy ratio. The financial pundits call them zombie funds. And so, it’s really good for non-performing funds that have less than $5 or $10 million in them to be purged out of the marketplace. So, it’s a really healthy place and I think it’s a sign that the ETF marketplace is strong. Now, something that…when I was looking at the stats when I was preparing for this conversation, the thing that excited me the most was that in 2022, 29 new ETF issuers came to market.
Andy: Whoa. Springer, I was gonna ask, you know, with all those launches, are these, you know, existing ETF issuers that are beefing up and extending out their product offering, are these brand new entrants? Because we’ve had a couple liquid alts, you know, alternative ETF sponsors on the show and these are products that are from the past 16…or, excuse me, 6, 12, last 18 months. So, it sounds to me like there’s a lot of…I call them boutiques, you know, boutique ETF issuers, it sounds like that’s a big part of the growth here?
Springer: Absolutely. Yeah, I look at it and I say, “Okay, 29 new brands,” these are new branded ETFs companies that may have had an existing brand but they may be completely new, phrases, terms, brands that no one’s ever heard of before, took the leap to come into the ETF space in 2022. And that’s what really…that’s a 12% increase, mind you, over 2021. So, 2022 had a very healthy increase in the amount of new ETF issuers that came to market. And the thing that excites me there is, yes, Teucrium launched ETFs in 2022. So, in some of those new launches, Teucrium was there.
But Teucrium also helped two new issuers who had never launched an ETF come into the marketplace, and a new ETF entering is going to be the company that moves the industry forward, that evolves the wrapper, that brings something new to the marketplace, and challenges the existing issuers and sponsors in the space to adapt. And that gets me really excited because back in 2009, that’s who we were. Teucrium was a new brand, a new entrant.
And so, to see aspiring entrepreneurs, be they may be a large company that is deciding to launch their new first ETF or just an individual asset manager that wants to go with this route, it gets me really excited because I really view them as an entrepreneur coming into a new space, ready to push the boundaries of what the ETF can do. And so, of everything that happened in 2022, I believe that the number of new entrants to the space is really the key indicator of the health of the marketplace.
Andy: Totally. And, you know, we had Sal, you know, the founder of Teucrium on the show in an earlier episode, I’ll make sure to link to that in our show notes here. We had a great conversation, but I forget the verbiage that we use where we were like…you know, because at the time when Teucrium was launching, it was right around the time ETF Database…Jimmy and Michael and I, we had launched ETF Database, and I remember some of those new products being very exciting. And looking back, I’m thinking that was like the second wave of ETF issuers, you know, depending on how you define it.
But let’s just say for the sake of argument, that was like the second wave. Feels like now we’re in maybe like the fourth wave and this is like a new generation of entrepreneurs, like you said. And, you know, like, startups, a high percentage of them don’t make it, but at the same time, the percentage of them that do make it will be challenging the status quo, creating value for everyone. And so, I think you’re precisely right, like these are, you know, the new ETF launches, in many cases, these are the very unique products that represent change, pushing the envelope.
And it’s also interesting that we really haven’t seen as much consolidation as I would expect, which I like. I mean, I love just having that variety in the marketplace. And it sounds like two of the issuers that brought their very first product to market, either last year or the last 12 months, were working with Teucrium. So, why don’t you tell us a little bit about the Teucrium white label program or how Teucrium is helping new entrants to the space launch their first ETF?
Springer: Absolutely, and I think, you know, looking at your conversation with Sal about a month or so ago, you guys described it as the Wild West. And while we weren’t the first ETF, you know, to come out by any means we were in that second stage where if you wanted to bring an ETF to market, your only option was to build an ETF company. So, you have to build…you have to be an entrepreneur to build an entire company before you could bring your asset management strategy to market. And now you don’t have to do that. You don’t have to set up the entire basis of a whole company in order to bring an ETF to market.
You can hire what’s called a white-label firm that uses their existing platform and they share that platform amongst many different product managers, sponsors, you know, any type of asset manager who wants to bring a strategy into the ETF wrapper, and they can share expenses, and they share experience to bring that product to market. And they no longer have to build an entire company to do that first. And so, Teucrium, we started ETF solutions in 2021 as a response to issuers or potential issuers coming to us and asking us for assistance. Teucrium, as in your conversation with Sal, I just recently watched it, and Teucrium was founded because an ETF issuer was asking for assistance with Sal’s expertise. That’s how the company started.
Now, since we started, we’ve had people come to us and ask us about milk ETFs, rice ETFs. And if you can name a commodity, someone has probably come to us and asked us about it. And we’ve always had an open-door policy, we’ve always wanted to help people understand what it would look like to launch an ETF, they can learn from our experience. But what we never did was really have the desire, the underpinnings to help someone do it. And in 2021, we were approached by a group with a very complex strategy that couldn’t find anyone to help them do it and we said, “This is the market.”
The market is moving towards alternative investment ETFs and right now, there’s probably three companies in the whole industry that could do what Teucrium is doing and we’re the only one that actually provide those services to other issuers. So, we’re really excited to take the knowledge that we’ve gained and the experience that we’ve gained as an ETF issuer that had to build our own company, and now have the ability to help asset managers focus on their strategy and not focus on how to run an ETF and how to build an ETF company.
Andy: Because, you know, reading between the lines, I think what I’m hearing is implementing an investment strategy, you know, active management, managing the portfolio, or just designing that strategy, that’s hard enough already. That’s a hard challenge, it’s hard to…you know, it’s just not easy. But just managing an ETF, issuing an ETF, there’s a whole stack of technical processes that need to take place to actually issue and manage the ETF. And, you know, you don’t necessarily…conceptually speaking, there’s no reason why an asset manager or sponsor who has a great strategy that could conceivably have an ETF, there’s no reason that every single person needs to reinvent the same darn wheel, right?
The same… because a lot of it is…you know, and I remember this even, you know, working with Michael and Jimmy back in the days when we ran ETF Database, a lot of the…may I say the geek speak, a lot of the technical aspects of ETF, you know, it’s interesting but at the same time, I didn’t always follow all of it and if I’m being honest, sometimes it might put me to sleep, you know? The point is, is somebody needs to do those details but not everybody needs to do every detail, right?
So, before we recorded, you know, in the weeks leading up to this recording, you and I have been emailing back and forth and talking about this, we want to break down how to launch an ETF and kind of simplify it. So, any asset managers who are listening, if you haven’t launched an ETF before, whether or not you decide to launch one, at least you’ll have an understanding of kind of the basic timeline, the basic steps and phases to do it. So, Springer, why don’t you walk us through the three phases to launching an ETF?
Springer: Absolutely, and this is a question that we get a lot. Asset managers come to us, you know, they find me through our website, LinkedIn, and they simply want to know, “How do I do this?” And the first place that I always start is you have to have a good idea. You have to have a novel idea, something that is not already being implemented in the marketplace, something that people are going to be excited about. You know, there are over 2,000 ETFs in the marketplace, and so yours has to stand out somehow.
You can’t just build a better mousetrap and expect that money is going to flow into it. The alternative to having something that’s new and novel is converting something that already exists and you want to put it into an ETF wrapper. So, maybe that’s a hedge fund, a mutual fund, an LP, something that you already have investors in and that you’d like to wrap into an ETF because you think that that would provide better access to your strategy.
Andy: A friend of the show, Jim Atkinson…to credit where credit’s due, when you mentioned converting the existing product, my business partners, Jimmy Atkinson, his dad, Jim Atkinson, we call them Big Jim, he had the first mutual funds to ETF conversion in history, I believe. So, there are folks converting mutual funds into ETFs. What are the other products that are sometimes being converted into ETFs? Is it all mutual funds, or is there anything else?
Springer: Hedge funds can be converted, LPs, separately managed accounts. You know, really any…especially in the alt space, anything that’s holding commodities futures, you know, that have the right liquidity that matched for the ETF. And that’s something that Teucrium would do, we would look at a strategy and we would tell you right from the beginning would this work in an ETF or not, or what changes would be made.
Andy: Well, and Springer, you know, thinking about it, it’s like that almost seems right off the bat like a higher proportion chance of success. If I already have AUM, I already have client dollars, it’s basically just a matter of selling these clients on the conversion rate because, you know, we want to get them to agree when we do the conversion that they’re gonna, “Okay, I’ll buy the ETF instead,” or, you know, “We’ll cash out of this or convert this into an ETF.” So, that’s kind of a less risky way of going about it because you already have clients, assets, AUM, and a strategy. But there’s other clients coming to you that basically just have an idea or strategy.
Springer: Correct, correct.
Andy: And those are the ones where you’re kind of challenging them almost like “Shark Tank,” or you’re saying, “Hey, pitch us on why this should even exist, is this really going to stand out in a crowded marketplace?’
Springer: Yeah, what I would say is that that evaluation process, there really are…you know, there are three steps to launching an ETF. There would be evaluate your idea, and then, you know, put it through the regulatory process and get approval for it, launch it, and then manage it. And the second two, you know, to launch and manage, those are mechanical steps that, you know, Teucrium has been working on for over a decade. Those are the details that you were talking about that the geeks understand and that we understand really, really well.
It’s the first point where you’re evaluating, “Is my strategy suitable for an ETF wrapper, and is my strategy suitable for the marketplace?’ That’s where you want to have a partner who can help you evaluate that. And the thing that sets Teucrium apart is that we’ve been doing that for ourselves for the last 14 years. So, the same way that we might have an idea internally, I might come up with an investment idea, one of my co-workers comes up with an investment idea, we challenge that idea internally until we have poked every hole in it possible because…
Andy: So, Springer, how many…now I’m thinking and I’m racking my brain, I’m thinking, “Well, Teucrium has, what, 8, 9, or 10, ETFs, and how many commodities are there?” How many ETFs have you shot down internally over the years? It must be a ton.
Springer: I’ve built a lot of ETFs that have never seen the light of day. And, you know, we’ve run a lot of tests, we’ve run a lot of strategies, and we really think about it. And that’s what we want to help other ETF issuers do. We do not…you know, if you’re a prospective issuer, we have no interest in taking your startup fee and seeing an ETF fail. We only want funds on our platform that thrive, we want to help partners succeed, and we don’t want to see anybody waste limited resources and capital.
Andy: So, you all help with that phase, then, with the product-market fit, or you know, I would almost call it a marketing phase, you know, because you’re trying to determine, “Is there a market for this?” Or, “How do you create the market?” And so, what portion, I guess, externally then, when a potential client comes to you with their idea, you basically try and fair it out upfront, “If we don’t think there’s a fit, we won’t even try and sell you on this, we want to determine if we think that the market will even accept this idea before you even start the rest of the process,” which, you know, obviously, has time and costs associated with it?
Springer: Correct, and also, we’re evaluating the strategy itself to say, “Can this strategy…can it be wrapped into an ETF? Will it get approved?” Then, what do we think? Which no one has a crystal ball. Do we think that it can raise assets? And that’s everybody putting their heads together, “How would we market this? How would we structure it?” Really planning for success in that stage. And then the other piece is, is determining that this ETF issuer that has the idea, do they have the financial underpinnings to support the ETF.
Andy: So, what does that mean? I actually had a question all around that, is that just…obviously, there’s annual expenses where until it hits a certain AUM, it’s going to be a loss leader. But you also have to have a certain amount of, like, liquidity that you provide to the market from day one. Is that what that means? I guess, what do you mean in terms of like working capital or what have you?
Springer: What I mean specifically is that…this comes as a surprise for managers who are thinking about launching an ETF is how much it costs to run one. And so, I can run someone through the startup costs, that might be somewhere between $100,000 and $200,000, depending on how complex the structure is. And that’s not $100,000 to $200,000 to Teucrium, there’s a lot of people, a lot of lawyers, things like that to get paid in this process to bring the fund to market. But that’s not where it stops, we need to make sure that a… and really, a sponsor needs to ask themselves when they’re planning for this, that they’re planning to support an ETF for three years. And so, it might take somewhere between, depending on the complexity of the strategy, $300,000 to $500,000 a year to run an ETF.
And I would want a sponsor to make sure that they’ve asked themselves, “Are we committed to this structure to do it for three years?” Because there might not be instant success. We want there to be, we hope that there will be, but there might not be. Teucrium has had some funds within the first three months that are close to $100 million. We’ve had other funds that we’ve managed for over a decade that haven’t reached over 50 million. And so, we need to…what I try to do is I help sponsors understand where they need to be at different phases of the lifecycle. And the first stage of the lifecycle is reaching breakeven.
Andy: Yeah, and that depends on an expense ratio, right, though? Because I’m thinking different ETFs have wildly…I was trying to do some math in my head, I’m thinking, “Okay, 50 million in AUM or 100 million in AUM, that’s going to be so different.” For Vanguard ETF, you know, expense ratio, whatever, five basis points, you know? But a lot of these more boutique ETFs have much higher expense ratios, is that right? I mean, they’re still low. In the grand context of asset management, they’re still low. But if it’s a 50 basis point or 75 basis point or 100 basis point expense ratio, that’s actually fairly high in the world of ETFs, right?
Springer: Yeah, your alternative investment ETFs are…if you stack them against all 2,000 in the marketplace, they’re going to be at the top for expense ratios. But when you look at what they charge compared to the other structures that they might be in, mutual funds, ETFs, separately managed accounts, they’re sometimes a fraction of what could be charged.
Andy: Like a hedge replication ETF might have a 100 basis point or even 120 basis point expense ratio compared to a hedge fund is going to be 3X or 4X that fee, right?
Springer: Exactly. So, in this range of higher end expense ratios and more, they’re harder to run, alternative ETFs are harder to run, which by nature makes them more expensive to run, your breakeven is going to be somewhere between $30 million and $50 million. So, you have to have $30 to $50 million in assets invested into the ETF before the issuer is able to make a profit. And that is a sobering moment for many potential sponsors is to talk about where that breakeven point is, where your first goal is, and that you need to be prepared to support your strategy for three years because we don’t know if success is going to come.
We don’t know if breakeven is going to come in the first year if you’re not bringing assets from another product indirectly. So, that’s something that we work with and that’s the entrepreneurial side. That’s one entrepreneur talking to another entrepreneur, to be frank and upfront about the challenges that it takes…that there are to entering a new marketplace, but then explaining that we’re here to help through every stage of it, we’re here to guide you through that process to do much of it. But we just want to make sure that you understand and that there are no unrealistic expectations of what it takes to bring a fund to market.
And again, these numbers using a white-label service are much cheaper than what it was for Teucrium when we first entered the space. You know, in 2009 and ’10, you had to have a couple of million dollars to set up your company just to be able to launch your first ETF. So, when you talk about being in the fourth or fifth stage of ETF evolution here, I mean, the access and the ease to launch one really has become democratized. And I will say that, you know, sort of your plain vanilla equities ETFs can be launched for a lot cheaper than this. I mean, we’re talking about alternative ETFs, things that push the marketplace, things that push the regulators, and that are very time-consuming and complex both from a regulatory and an internal management perspective.
Andy: Well, on the regulator point, like, what’s interesting to me is like the Bitcoin spot ETF, you know, it’s been like a couple years now, it’s consistently in the news, how the regulators won’t approve that, right? I think it’s Bitcoin futures ETF or whatever it is. How often are alternative ETFs being denied by regulators? I mean, is that pretty common?
Springer: I don’t know that there’s any statistics on how often they’re denied. I mean, there was a lot of attention on how many Bitcoin funds were denied. Teucrium did get through, we got one through in 33X space, very unique fund, actually being referenced very heavily in some of the lawsuits taking place with the SEC as far as spot Bitcoin futures. So, you know, what we were able to do and as far as, you know, what we thought the SEC would go on something like that is being utilized potentially up to the level of the Supreme Court to try to get the spot ETF to launch. So, that’s very interesting.
But I don’t know about necessary in terms of flat denial. We’ve had funds denied from the SEC and usually what happens, if you have an idea and you want to wrap it into an ETF and you first submit that to the SEC, the SEC might come back, basically, and just suggest that you pull your filing. And when the SEC suggests that you pull your filing, that means stop, right? You know…
Andy: It’s like when the mafia suggests something, right? It’s like, “You might want to take this advice.”
Springer: And so, you can decide, “Am I gonna push them or not?” Teucrium has been in that perspective, where we said, “We really want to push the market, we want to see what happens,” the SEC says, “Stop, you know, pull your filing,” and we have. Others choose sometimes to put a lot of time, money, and resources into pushing the SEC…
Andy: Why would you do that? Springer, why would you do that? If the SEC says, “Hey, I just want to let you know you’re wasting your time,” why would you say, “No, I would like to continue to waste my…?” Is it just like a game of chicken, you want them to to have to formally deny it so then there’s a paper trail?
Springer: And sometimes the strategy is a formal denial will indicate where the SEC stands on something, so you’ll know how far you may be from approval and being years or what needs to be changed. Other times, you know, we have…Teucrium has a lot of experience in this in both having funds that have been asked to not go through the approval process and we’ve also been through very arduous approval processes for our original funds because they were very new, especially in the food space. And then secondly, in the crypto space, as well as the volatility space, I mean, these are very exotic markets for the SEC to be approving products in.
So, we’ve got a lot of experience there, and so we also know what to look for. We know what they will be looking for in terms of structure, liquidity, protecting investors. And so, we’ve become very good at knowing beforehand would something make it through the process or not. And again, this is very detailed stuff in terms of how you go through that approval process with the SEC. There are two different ways that you can register an ETF. I think you and Sal got into that a little bit, 33X versus 40X.
And depending on which way you go, gives you some more guidance with the SEC, but also some more runway for where, you know, how to get that through the SEC. And this is something that we have a lot of experience with and again, when we vet a product…when we vet our own strategies, other people’s strategies, it’s something that we’re looking at very closely because it is the first stage of bringing an ETF to market.
Andy: So, okay, phase one, preparation, preparing to launch your ETF, this is covering, “Is their product market fit?” If you’re working with Teucrium, they’re going to tell you whether we think that this can actually accrue enough assets. We’re kind of gut-checking, do we have three years of runway? Just more entrepreneurial questions. It’s good question, though, it’s like the same kind of question they would ask with angel investing or venture capital or private equity. We need to give this thing enough runway to succeed. And then do we think the SEC will approve it? Or maybe how will they approve it, 33X versus 40X? Or, you know, how do we want to submit this?
Okay, let’s presume then, that I’ve given you this great idea, Springer. It’s the Andy Alternative ETF, you know, awesome strategy. It’s such a good strategy, I can’t even tell you guys about it yet, right? But it’s a great strategy, we get approved by the SEC, we make sure we have three years for the runway, all systems go, we’re going to launch it. Tell us about phase two now. This is a really important day, right? You always want to make a good first impression and ETF is only going to get one launch day. So, walk us through what happens on launch day, maybe even a successful launch day or what can go wrong.
Springer: Absolutely. So, in that time period leading up, right? We’ve been talking for a couple of months, we did that gut check, we filed with the SEC, filing with the SEC could take anywhere between 75 days and 180-plus, right? We’ll get through that. During that time period, we know that we’re going to get approval, right? We might have to change some things, we might have to work with the SEC a little bit do this and that. But while we’re doing that, we’re setting up all the underpinnings for the ETF. We’re establishing accounts with different service providers that you have to have, we are building the models to be able to actually manage these.
I mean, you’re talking about alternatives, sometimes commodity futures, volatility futures, maybe they’re not futures at all, they might be something different, some other type of derivative. You know, we’re setting up how is the fund itself going to be managed on a day-to-day basis? All of this leads up, all these agreements, the prospectus, the website, the marketing, all of this leads up to launch day. But there’s a really important day right before launch day that takes place in the background, no one sees it, and it’s called the seed day.
And the seed day is when the ETF gets its first assets and usually, those assets are provided to the fund by a market maker, a lead market maker, a company that has an agreement with your fund through the exchange that they will manage your product with a tight bid-ask spread so that it launches into the marketplace in a healthy manner. And what they’ll do is they’ll provide what’s called the seed for the fund, it might be $1 million, $2 million $5 million, something that they’re putting into the fund for a very short period of time. That comes in the day before. And Teucrium would take that money, once that first create came in…they’re called creates to bring money in, redemptions to take money out.
The create comes in and Teucrium buys the assets for your strategy. So, whatever that strategy might be, if it’s, you know, a diversified commodities fund, we would buy all the different commodities that are in your strategy, and that, you have to have holdings in order to have performance. And it’s a really interesting thing is that when that starts trading the next day, it’s trading based on the value of what’s in your fund. That’s what an ETF is made of. And so, you have to have those in the fund in the first place.
Andy: You have to have underlying holdings and it’s like a chicken and an egg, because how can I have underlying holdings on launch day, it hasn’t launched yet? So, you kind of quiet launch it off the exchange with $1 million or $2 million or $5 million bucks, and then now I guess on launch day, now there’s already 24 hours of…
Springer: That it have holding, that it have holding. I mean, that’s what we did, right? We established that the fund has value. And then the next day comes and this is the really exciting part. This is the exciting part for the issuer, right? They might have thought about this idea two years ago, talked about it, found the capital to do it, found us, we launched it, we got through all this process, and now it’s launch day, right? We might have gotten you the opportunity to ring the opening bell at the New York Stock Exchange, your friends, your families, everybody there, you’re up on the bell ringing, I’ve done it, it’s one of the most exciting things that you can do on that day.
Andy: Well, how do I get that opportunity, Springer? You can give me that opportunity. I want an Alternative Investment Podcast during the opening bell, so we’ll sidebar on that later.
Springer: I think we can do it, I think we can do it. It is literally one of the most fun things that you can do. And so, you’ve got that and you’re standing there, you open the bell, your fund starts trading, right? Now, there’s a lot going on on Teucrium side, we’re watching a lot of different things, we’re watching bid-ask spreads, we’re making sure that it opens. Now, if all goes well, this is a really boring process that no one wants to hear about. Sometimes it can get very exciting and we have to fix a couple of things and it might take 15-20 minutes, an hour maybe for the fund to actually enter into the marketplace. But once it does, it should honestly be a pretty boring process, which is…
Andy: Now, what are we fixing? Is this like not necessarily bid-ask spread liquidity stuff, you’re talking more like the electronic plumbing behind it. Basically, I imagine there’s like a bunch of computer systems that are routing, you know? And again, I don’t need to know all the details, it sounds like plumbing. It’s like the electronic plumbing?
Springer: It is. You know, you build your house and you turn the light switch on and you want it to work. Most of the time it does, that’s great. Sometimes it doesn’t and you fix it, and you fix it really fast. And so, you’re there, you’re celebrating, Teucrium is in the war room and we’re really making sure that this thing comes to the market for you.
Andy: Is Sal in the war room with you? Is this all hands on deck?
Springer: You know, it used to be. And as we’ve gotten more efficient with all of our processes, it has become more of a less exciting process, which is a good thing.
Andy: That’s good. Okay.
Springer: Now, this is the time that, you know, you’re getting…you know, the issuer, the new sponsor is getting congratulations from friends and family, people are sending them pictures of their brokerage account, “I bought five shares of your fund.” I mean, we even do this, right? I mean, we launched…like, we get so excited, we all buy shares, and then we talk to people about it. And frankly, this is the first time you as the issuer of this new ETF, it’s the first time you get to talk. When you file for an ETF, you’re in a quiet period, you cannot speak about it. If you go out and pre-sell your fund, if you talk about your fun before it’s approved by the SEC, that is a big no-no and you can get into a lot of trouble for it. So, you’ve been quiet. You’re really excited now, and so your marketing is pumping, your LinkedIn is going crazy. You know, this is the fun part, right?
Andy: Now, are you allowed to talk about your own ETF? I mean, if I’m an issuer, I’ve issued an ETF, maybe I’ve worked with Teucrium to, you know, do all the plumbing and they help me but am I allowed to talk about the ETF itself or not? Maybe I’ll talk about the strategy or maybe I shouldn’t talk about performance? You know, I know you’re not a lawyer, I’m not a lawyer, we’re not giving anyone legal advice here. But what’s kind of the…you know, when you have an ETF, what’s the difference in terms of what I can say versus if I have a private placement, private equity fund, it’s like, you know, I got a lot more leeway then, right?
Springer: Sure. You know, it depends on how it would be structured from a regulatory standpoint. So, we have a lot of different solutions for an issuer to talk about their funds. You might have to have me with you and you can talk about the strategy and I can talk about the fund, you might already be a company that has your registrations as registered reps, and therefore, you’d be able to be a marketing partner in the fund and you’d be able to talk about the ETF itself. So, there’s a lot of nuances there and a lot of different solutions, depending on how much responsibility an issuer wants to take in that regard.
I think one of the biggest things that comes along with a publicly traded fund is the oversight of your material and your material also being the words that you speak. And so, it’s heavily regulated. And in the alternative space, you’re probably going to also be regulated by regulators for commodities, so the CFTC, the NFA. And so, you’re gonna have a lot of different parties wanting to have some control over what you are and are not allowed to say.
Andy: So, yeah, just to clarify, then. You know, like, if Teucrium is releasing a brochure or a new website to promote a new fund that Teucrium is launching, all of that is essentially getting approved by the FCC or directly under the oversight and there’s probably lawyers looking at all that, versus, you know, Springer, you can come on my show, we can talk about concepts all day long and there’s no problem. But once you start talking about the actual product, did you have to be very careful? And it sounds like it’s something that you coach your clients on to consider even in that initial setup phase, like, “Let’s consider how we want to structure this to then give you the ability or not, or under what circumstances that you can talk about it later.” Because to me, that’s a shame. If I have a product that I love, that I put my heart and soul into it, and then it’s like I can’t even talk about it? Like, you know, I’m a marketing guy, I’m a sales guy, how am I supposed to sell something if I can’t talk about it, right?
Springer: Yeah, it is very hard and it can be frustrating but the best part is, is that there are a lot of creative solutions for it. One of the best solutions is to have someone at Teucrium stand next to you. So, you can talk about the things that you love, you talk about strategy, you talk about the marketplace, you just can’t say the ticker or the fund. I’ll talk about the ticker, I’ll talk about the fund, and I’ll talk about the performance of it. And so, if we separate those two things, you know, in a regulatory compliant way, it allows issuers to be a part of the distribution of their product, which we want them to be.
If you’re an issuer, especially of an alt product, you’re the one that knows your strategy, you know why you did it, you’re the entrepreneur, you’ve got the passion behind what you did. And so, we want you to be a part of that, you have to be a part of that, or, you know, it’s going to be harder to find success because it’s a product with no life, with no soul. And so, that’s an important part that we always try to make…that we can have happen for our issuers, we want them to be able to talk about their strategy.
Andy: Totally. And I think now we’re kind of getting into phase three, the post-launch management. You know, you’ve already kind of referenced some milestones here, we want to make sure we have enough runway to last three years and, you know, again, these numbers all are dependent on the asset class strategy, expense ratio, and all that. But we want to hit 25 million, 50 million AUM, ultimately, we’ll want to probably hit 100 million or more in AUM. So, what is this, you know, phase three? You know, so after launch day, it’s like the next 1,000 days, essentially, right? These first key three…you know, these first three years, these key 1,000 or so days. What are the keys to success here? I mean, is this mostly marketing, or are you talking more about technical operational types of things?
Springer: It really falls into three buckets. And so, for the sponsor…for the issuer, it feels like you hit the finish line. You launch the product, it’s out there, you hit the finish line. And for Teucrium, we just hit the starting line, we’re thinking that we’re going to operate this fund now into perpetuity forever. And each day comes along with pitfalls and risks that come along with it. Those might be regulatory, they might be operational, whatever they might be. And so, what our job is, is to make sure that the processes are in place to keep that ETF running in a healthy and compliant way, day in and day out.
That is the real grind. That’s the hard part. That’s where the expertise comes in. I really do believe that there are…at this stage in the game, there are enough structures out there that basically anybody can bring a fund to market if they want to. How to actually keep it in the market and stay compliant, that’s the really difficult stuff. And, you know, you have to…
Andy: Well, because if you have to get to 50 billion in AUM, I have to do marketing.
Springer: No, you have to. And so, we break it down into three buckets. You’ve got regulatory and compliance, you’ve got operational considerations, which is both the management of the strategy itself and the management of the ETF, and then you have sales and marketing. And each one, they fit in with each other, they have overlap. But your fund has to operate every day, every day it has liquidity, people are buying and selling it every day. So, you have to have a team of people who understand the underlying strategy and are able to invest and divest assets for the fund every day and know how the plumbing of the whole ETF ecosystem works on a daily basis.
Then, an ETF has daily reporting, monthly, quarterly, and annual reporting requirements. It’s a public fund, you have to give information to the public about your fund on those time periods and that takes an immense amount of work. And so, those two pieces together the operational, and then the compliance, the accounting, it’s real critical parts, that’s what runs the ETF. And you can run that perfectly, that machine can run in perpetuity, but you never bring in a new dollar, which means all that’s doing is costing you money. You’re running a fantastic ETF, it’s perfect, it’s never had a regulatory issue at all, all of your deadlines are hit, awesome, great thumbs up to everybody. You’ve made no money, you’re losing money.
Andy: Well, you stayed out of prison but now you’re dead broke, right? So, one out of two.
Springer: So, that third bucket is marketing, that is getting out there and finding a strategy to reach investors, inform them about your strategy, and then bring them into it as an investor. And that is the hardest part. Everything else in the ETF industry has been done, no one, Teucrium included, has figured out the holy grail for how to bring investors into an ETF. It’s difficult. There are things that work, we have tried many things that don’t. It’s the hardest part and it’s the part that no one can give you any guarantee of. You might launch a strategy and it might be the perfect strategy at the perfect timing and you’re the billion-dollar, you know, unicorn in the first three months, or it might sit.
We’ve had funds that have sat at 5 million for years and years and years while we tried to figure out the perfect investment case to bring investors into those funds. And so, that’s where you really need to start to put your effort and time, and that’s also where you need to be prepared all the way from the beginning of what your budget is there. Distribution can be a very expensive process and you just need to know what you’re prepared to do from the beginning.
Andy: So, that is so interesting to me. I know we’re almost out of time but I want to ask a follow-up there. And, you know, you don’t have to give me the secret sauce, so to speak, maybe just some broad ideas. But in your experience then in marketing this product…and I mean, I’m a marketer at heart. I love finance, but I’m a marketing guy. So, Springer, you’ve talked about Teucrium…you know, at this point, you know, you’re kind of the old guard, the OG in the space, you’ve tried all kind of marketing, everything under the sun it sounds like. What tends to work? What tends to not work? I’m honestly curious.
Springer: For us, we’re small, right? We’ve always been a small company, we’ve got limited resources. And so, what we do is we’ve really developed what we think of as the sales funnel. And what we try to do is broad awareness at the top, make sure that as many people as possible know that this exists, and we invest dollars there until you reach a point of diminishing return. And so, we’ve got statistics that can tell us should you stop spending money there, right? That’ll tell us when you’ve hit the point of diminishing returns. If you haven’t hit the point of diminishing returns, there’s no point in doing anything else other than to continue to build awareness.
Andy: Because a lot of…if a retail investor is looking for a corn ETF and I didn’t even know one exists, oh, boom, this exists, I might just go…I might just log etrade.com and buy it without talking to anybody on your team.
Springer: Exactly.
Andy: Okay, so that’s the top of the funnel…
Springer: Digital advertising, broad awareness, content creation is huge, putting that out…distribution of content and doing that efficiently. And then it’s starting to get into platforms, having individual conversations with advisors, finding people who manage money who are interested in this space, and that self-identify, frankly, as wanting to have a conversation with you and there are strategies for trying to identify those people. Having those strategies, working with them, converting them, those are sort of your tried-and-true methods. Bigger companies are able to hire dozens, hundreds of wholesalers to go out into the marketplace and tell their network and their geographic area about something.
This is not the area that Teucrium operates in. We’ve never been at that scale, we may never be that scale. And so, what we’ve done is, from an entrepreneurial standpoint, figure out how to use limited marketing budgets and take them as far as we possibly can. And usually, that comes from harnessing something very unique from the issuer. You know, us being the issuer or somebody else, what sets you apart? What’s unique? Putting that into a story that is easy to tell, easy to understand, and then distributing that story out as broadly and widely as we possibly can.
Andy: Well, totally, and Springer, I’m right there with you. I mean, I’m an entrepreneur at heart. And so, you know, I kind of like rooting for the little guy, all these boutique ETF issuers. By the way, there’s also some very high-quality large ETF issuers.
Springer: Absolutely.
Andy: Frankly, there’s just a lot of value from top to bottom in the space. That’s why ETFs are so popular. But one thing I love about them is, you know, top level, there just aren’t the gatekeepers in ETFs. Because back to that retail investor or advisor, independent IRA, if I’m searching for corn ETF or, you know, agricultural commodity ETF, and then I learned this exists, there’s no gatekeeper. I can go on my online brokerage account and I can execute, I can buy that ETF right then and there, nothing else necessarily needs to happen in that, you know, sales process. So, to me, that’s really cool.
And then on the other end, it’s just they’re not…you know, with other alternative products, I find increasingly some issuers are making the strategic decision that, “We’re not going to focus so much on distribution and forcing the…” You know, what you would call push marketing. What I like so much better is what you’re talking about, pull marketing, which is I have a unique product with a unique value proposition, it’s now my job, I need to tell that story over and over and over as many times as I can. And by the way, it helps if it’s a simple story. If it’s a complicated story, retail investors and advisors tend not to remember it.
But if it’s a simple story, tell it as much as you can, as consistently as you can, as many places as possible, especially where investors and advisors might find it. By the way, they’re on Google all the time searching for things. So, you know, even like a podcast like this one, “How to launch an ETF?” or whatever the title is, like, somebody might come across this two years from now. That kind of marketing, it creates the demand and then there’s no gatekeeper in the middle. And that’s the beautiful thing. To me, that’s long-term equity. You have the unique product, you figure out how to tell the story, and then you’ve just…then, you know, the investors are coming to you, the clients and customers are coming to you.
Springer: The best thing you can do is give value every time you speak. Try to teach someone something new, try to educate as much as possible. We have found even with our own ETFs, that we get more engagement when we talk about how ETFs work and how commodities markets work than we do when we explain the intricacies of the benchmarks inside the corn ETF, right? Those are the things that people want. And you’re seeing that online as well, on people’s LinkedIn accounts, on their YouTube. Give away the content, give the content away for free, capture the customer later. That is a…it’s a hard way to market, it’s a lot of time and energy that goes into creating educational content to give people, but that’s because it’s value. If it was easy and it was cheap, then there wouldn’t be much there, right? It would be…and so, consumers, investors are demanding education.
And that’s why I really do want to work, I want issuers of ETFs to be involved with it because they might have something new to teach someone. And, you know, one of our clients that we launched, they were trying to, you know, distribute their ETF and we told them, “Stop distributing the ETF and start distributing your education.” And so, they pivoted, they’ve got an ETF website and then they also have an education website where they only talk about their marketplace. Nothing about the funds at all. The education website gets more traffic, but people know who they are because they’ve launched these ETFs. And so, it’s really about what value can you give away for free, and people love that, they really do. I’m sure you see it on your…I see it on my LinkedIn, I give away something valuable that someone might not know about how to launch an ETF and it gets way more interaction than when I say, “Hey, I can help you launch an ETF.”
Andy: Well, Springer, that’s how we got you on the show. I think it was a LinkedIn post and you posted something about how to launch your own ETF and I’m like, “Well, I want to learn more about that.” It’s exactly what you said. You know, Ashley Tyson, my friend Ashley Tyson, he calls it leading with the giving hand. You know, just this concept that if you deliver value educational content, it’s a way to establish trust and to break through the noise. And I’m big on simplicity, right? And so, how to launch an ETF? Like, you know, even what we’re talking about today, it’s a simple story, it pulls people in, now they know who Teucrium is if they didn’t already, and, you know, next time they’re thinking of this, they’re going to Google you, they’re going to head to your website.
So, it is long-term but I think ultimately, having that brand focus, story focus, content focus, it is higher ROI in the long term, but it requires long-term thinking, 100%. Springer, this has been so incredibly helpful. I’m guessing that somewhere out there, the next issuer has been listening or watching this. Where can they get in touch with you, or where can they learn more about Teucrium ETF solutions?
Springer: Absolutely. If you go to teucrium.com, on our website, you’ll see the “ETF Solutions” tab and you can schedule a consultation directly from there. Every meeting…any person who puts in a scheduled consultation absolutely gets one, talk about anything that you want in terms of launching your ETF. I’ll say one of my favorite conversations I had recently was a young guy about 22, 23 years old, had just had a nice exit from a tech firm, and he wanted to launch an ETF. And I taught him everything that he needed to know and what he needed to know was that he was not ready to launch an ETF.
And it was so exciting because now he knew what he needed to do for the next couple of years in order to be able to do that and that’s what we want to be there to do. We want to support other entrepreneurs, people that were just like us back in 2009, have a great idea and don’t know where to go, we want to be there to help you at any stage of what that is. And so, if you have questions, you can find me on LinkedIn or you can schedule a consultation on the website or just give us a call. We’re a small team, it’ll get forwarded right to me and we will help you start from where you’re starting from.
Andy: Springer, I love that, the open door policy and, you know, leading with the giving hand. I really appreciate your insights and I’ll be sure to link to, you know, the ETF solutions page in our show notes and also link to your LinkedIn. So, everybody listening or watching, don’t be afraid to get in touch. And Springer, thanks again for joining the show today.
Springer: Thank you for having me, Andy. I really appreciate it. It’s been a lot of fun.
