At The Money: Building an ETF

Summary

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Masters in Business: At The Money – Building an ETF

Host: Barry Ritholtz (Bloomberg)
Guest: Wes Gray (ETF Architect, Alpha Architect)
Date: January 28, 2026

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Episode Overview

This episode explores the nuts and bolts of creating and launching an Exchange-Traded Fund (ETF), offering an insider’s perspective for analysts, strategists, and fund managers interested in transforming investment strategies into market-traded products. Barry Ritholtz interviews Wes Gray, an ETF innovation expert, on the realities, challenges, and strategic considerations behind taking an idea from concept to a successful ETF launch.

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Key Discussion Points & Insights

1. ETF Launch Fundamentals

• Primary Success Factors:
  • Low Fees: Must be competitively priced to attract investors.
  • Significant Capital: Need to be able to fund operations for 3–5 years to build credibility and attract flows.
  • Passion: Persistence in marketing and “door-knocking” is key to survival (e.g., referencing Perth Tolle).

  “[Y]ou got to have low fees for the most part or people ain’t going to buy your product. And low fees means you also got to have a lot of capital ... And then you got to have the passion.”
  — Wes Gray [02:11]

2. ETF Launch Timeline

• Typical Timeframe:
  • Can be as quick as 4 months for straightforward strategies, though delays up to 4 years are possible due to internal sponsor issues.

  “We can get this thing out the door in plus or minus four months ... if you want to launch in four months for like a relatively straightforward ETF, that’s possible.”
  — Wes Gray [02:59]

3. Seed Capital Requirements & Structuring

• Rising Capital Thresholds:
  • Previously ~$5M, now standard guidance is $25M (soon possibly $50M) to imply credibility and long-term viability.
  • Capital can be provided in two ways: Cash or securities ("property") via IRS Section 351 for tax-free contributions.

  “...break even in people’s minds is 25 to 50 [million]. ... How do you seed these things? Well, there’s basically two methods: either seed with cash … or you can seed it with property …”
  — Wes Gray [03:42]

4. Cost Structure & Economics

• Start-Up and Operating Costs:
  • Initial set-up ("soup to nuts"): ~$50,000
  • Ongoing annual costs: ~$200,000 (legal, compliance, audit, listing, distribution, marketing)
  • Breakeven depends on fee levels:
    • 1% fee = $20M breakeven
    • 0.20% fee = $100M breakeven

  “...looking around 200k a year. ... if you charge 1%, your break even is 20 million. If you charge 20 basis points... your breakeven is 100 million.”
  — Wes Gray [05:22]

5. Active vs Index-Based ETFs

• Active Favored Over Indexing:
  • Most new ETFs should be active (even systematic strategies) because of lower overhead and greater flexibility (e.g., adjusting rebalancing during volatile periods).
  • Index-tracking requires more paperwork and compliance, reducing operational agility.

  “Now it’s almost always the case, just go active. Even if your strategy is 100% systematic, why is that? Well, there’s just low overhead cost... and ... a little bit more flexibility at the margin.”
  — Wes Gray [06:49]

6. Unsuitable ETF Strategies & Red Flags

• What Not to Launch:
  • Avoid highly leveraged, overly complex, or opaque products (like “triple levered” or gimmicky ETFs with hidden costs).
  • Focus on transparent, efficient, and long-term viable products.

  “If I’m not going to recommend this to my parents or my grandma, why do we have this in an ETF ... Things like double lever, triple levered, whatevers. A lot of these gimmicky products... I can’t stand those products personally.”
  — Wes Gray [08:07]

7. Liquidity & Trading Considerations

• Two ETF Types:
  • “Liquidity Diamonds” (e.g., SPY, QQQ): Secondary market is very liquid; trades happen between investors.
  • Normal ETFs: Primary liquidity provided by market makers; spreads are based on the underlying asset liquidity.
  • Underlying asset liquidity dictates bid-ask spreads and trading execution.

  “...vast majority of that bid ask spread is simple to understand: what would it cost you as a trader to acquire or dispose of that basket of securities?”
  — Wes Gray [09:40]

8. When Not to Use an ETF Structure

• ETF Disadvantages:
  • High transparency requirements (not suited for IP-sensitive strategies).
  • Cannot close to new money (problematic for capacity-limited strategies like microcaps or penny stocks).

  “The big disadvantages of the ETF structure are transparency and you cannot close an ETF. ... If we have a strategy where transparency is just not going to play favorably ... you can’t do an ETF ... The other one is capital constraints.”
  — Wes Gray [11:26]

9. Competing with Industry Giants

• Best Spaces for New ETFs:
  • Avoid broad, scalable strategies (that Vanguard & Blackrock dominate).
  • Instead, specialize in “boutique” or niche offerings that require distinct expertise or are capacity constrained (not scalable to billions).

  “Basically focus as be good at being a boutique because you’re never going to beat Vanguard at delivering scale trillion dollar market beta. ... 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 and we don’t want to compete with the monopoly.”
  — Wes Gray [13:09]

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Notable Quotes & Memorable Moments

• On the ETF Launch Trifecta:
  “...low fees, capital and passion... you got to have the passion.”
  — Wes Gray [02:11]

• On ETF Structure Viability:
  “If I’m not going to recommend this to my parents or my grandma, why do we have this in an ETF where anyone with a Schwab account can click the button and have a party?”
  — Wes Gray [08:07]

• On Competing with the Giants:
  “You’re never going to beat Vanguard at delivering scale trillion dollar market beta. ... focus on things that Vanguard or iShares can’t do well...”
  — Wes Gray [13:09]

• On Active vs Index:
  “Even if your strategy is 100% systematic ... just go active.”
  — Wes Gray [06:49]

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Key Timestamps

• [02:11] – Success ingredients for an ETF launch
• [02:59] – Realistic ETF launch timelines
• [03:42] – Capital requirements and seeding mechanisms
• [05:22] – Annual costs and break-even calculations
• [06:49] – Index vs. active ETF structuring
• [08:07] – Red flags: Which strategies to avoid turning into an ETF
• [09:40] – How ETF liquidity and spreads work
• [11:26] – When SMAs or mutual funds are preferable to ETFs
• [13:09] – The boutique advantage in the ETF market

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Tone & Content

Barry and Wes deliver candid, practical insights wrapped in conversational, at times humorous, “in-the-trenches” candor—Wes’s aversion to “triple-levered” ETFs and empathy for individual investors shines throughout.

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Summary Takeaway

Launching a successful ETF requires more than just a good idea—it demands low fees, substantial seed capital, and relentless determination. Operating costs are significant, and industry giants dominate broad index and scalable offerings. New ETF issuers should focus on boutique, specialized strategies and carefully consider structural pros and cons, particularly liquidity and transparency requirements. If you have a differentiated strategy and the resources required, launching an ETF may bring meaningful scale—but it’s not for the faint of heart.

Transcript

[Hannah Fry]

I'm Hannah Fry and I'm on a mission to find out about a mysterious day called Q Day, which experts think could be the moment our most precious encrypted data is suddenly at risk. Learn more later in the podcast.

[Wes Gray]

Bloomberg Audio Studios Podcasts Radio news you're.

[Unknown Singer]

So beautiful Residential Char so careful when I'm in your arms Cause you're working mystery.

[Barry Ritholtz]

Mutual funds, trusts and ETFs. Have you ever wondered how these are put together? Are you an analyst, strategist or fund manager that has a really good idea? Have you thought about launching a fund to employ that idea? I'm Barry Ritholtz and on today's edition of at the Money, we're going to discuss how to build your own exchange traded fund or etf. To help us unpack all of this and what it means for your portfolio, let's bring in Wes Gray of ETF Architect. He helps managers turn strategies into ETFs by providing turnkey white label platforms that handle legal compliance, operations, portfolio management, allowing sponsors to focus on the idea and distribution. And Wes also runs the Alpha Architect shop as well. Full disclosure, Wes Gray and ETF Architect are helping my firm, Ritholtz Wealth Management launch a new ETF later this year. So Wes, let's start with the basics. If I'm someone with a novel strategy and a good idea for a ticker, what are the elements that determine whether or not this ETF launches or whether it just dies on the vine?

[Wes Gray]

Well, I think it's going to come down to low fees, capital and passion in ETF market. As you know, you got to have low fees for the most part or people ain't going to buy your product. And low fees means you also got to have a lot of capital to back this thing because you got to be around for at least three to five years to tell your story. And then you got to have the passion. You're in a market competing with monopolies like Blackrock and Vanguard, so you got to be someone like a Perth Toll that we talked about previously, where you just have to go knock on doors and tell people why your product and your story is so great.

[Barry Ritholtz]

Huh? Really interesting. So I'm curious as to the timeline from the original conception to trading day. What's a realistic timeline and where are the common bottlenecks?

[Wes Gray]

So we generally tell folks four months, you sign the letter of intent and you're ready to whoop it on. We can get this thing out the door in plus or minus four months. Obviously that could go out to Four years depending on your own internal issues. But we've got this thing so checklist and automated at this point, if you want to launch in four months for like a relatively straightforward etf, that's going to be possible.

[Barry Ritholtz]

Four months seems really short, but I guess I'm imagining how long it takes to accumulate enough seed capital. Launch. How much money under management do you need to launch an etf? How does that get structured? What's the usual launch dollar amount?

[Wes Gray]

Sure. So this is a moving target. And let's say four or five years ago we would have said hey, 5 million minimum. Now we tell people 25 million and I'm about to probably move it up to 50 million. And, and really it's, it's not because of the operating costs of the ETF is to convey credibility to the marketplace. We like people just everyone kind of knows like, and where's your break even? You know, because I want you to be in business three to five years from now. And usually that break even in people's minds is 25 to 50 mil. So anyways, barrier to entry just on that. Now how do you seed these things? Well, there's basically two methods. Either seed with cash. So you launch the ETF and people go open up their Schwab account and click the button and you know, pay cash to buyer etf. Or you can seed it with property where there, it's a little bit convoluted, but there's a thing called section 351 where you can actually contribute property tax free to seed the etf. So basically cash or property is the two methods you can use.

[Barry Ritholtz]

And I'm assuming property is usually individual stocks or bonds, is that right?

[Wes Gray]

Yep, you got it. So, so if you have a portfolio of securities, public securities that naturally fit in the ctf, you can contribute those tax free and then that that property serves as initial seed for essentially the launch of the etf.

[Barry Ritholtz]

So you mentioned break even. Take me into the minutiae of what the back end of this looks like. Legal, audit, administration, listing, distribution, marketing. What are the big costs that any ETF manager has to run? Where do people kind of make mistakes with these?

[Wes Gray]

So yeah, I'll, I'll kind of reverse the, the question and, and let me tell you what we've done, the cost and what you have to do. Because what you're asking about is a total dumpster fire behind the scenes. But essentially the for our platform is like you show up with the spreadsheet, tell us what to do and you go market and distribute this Thing comma compliantly because we have oversight responsibilities. That's your two primary jobs. Now we're going to deal with all the dumpster fire behind the scenes and the generic cost of doing this to launch an ETF. Again, I'll sandbag for a generic ETF just with easy numbers. You're looking at a 50k startup. Soup the nuts. And then, which is not the bad news. The bad news is the ongoing cost to deal with all the aspects you just talked about. And you know it's plus or minus, but you're looking around 200k a year. So what the heck does that mean as a business setup? Well, you know, if you charge 1%, your break even is 20 million. If you charge 20 basis points, which is a much, you know, much more marketable, your breakeven is 100 million and then everything in between. So, so obviously your break even depends on your fee. But you're looking at 200k burn a year on average.

[Barry Ritholtz]

Let's say someone comes to you with a systematic strategy. How do they decide whether or not this is based on an index and running it fairly statically versus more active ETF that's run more dynamically?

[Wes Gray]

So in this, this advice has also changed over time. We're in the old days we would say hey, index active, there's a bigger trade off there. Now it's almost always the case, just go active. Even if your strategy is 100 systematic, why is that? Well, there's just low overhead cost. I don't have to pay for a third party index agent, I'm going to pay for third party service providers. And, and I also have a little bit more flexibility at the margin. So for example, let's say I'm on an index versus an active and I'm doing the exact same strategy. But we know this week there's going to be three Fed meetings and you know the world's going to blow up. I might not want to rebalance this week, I'll just punt to next week. That's easy in an active strategy, in an index strategy that's possible. But the paperwork trail and the compliance to be able to facilitate that's essentially a nightmare. Which means most index funds just follow the book no matter what, unlike little minutiae decisions like this. So we recommend active at the margin.

[Barry Ritholtz]

So you must see a ton of different strategies. What do you see that really shouldn't be put into an etf? What kind of strategy? Even if a manager is passionate and excited about the idea. What, what are the sort of red Flags that, hey, you don't want this in an etf.

[Wes Gray]

I mean I'm. I don't know if I'm weird or just old school or conservative, but. But if I'm not going to recommend this to my parents or my, my grandma, why do we have this in an ETF where anyone with a Schwab account can click the button and have a party? Right, so what does that mean? Things like double lever, triple levered, whatevers. A lot of these gimmicky products that are extremely expensive and they have tons of embedded costs via like swaps and a lot of other things that aren't transparent. I can't stand those products personally. Does that mean that people won't do them? Well, of course not. If you can sell out to people that are going to pay 1% for your stupid idea, great. But I'm not a big fan of having those products in the ETF marketplace.

[Barry Ritholtz]

So you're not a big fan of the inverse 3x levered Bitcoin ETF?

[Wes Gray]

I know I'm not a fan. Again, maybe I'm just a funny daddy and I need to move on in the world, but I just kind of old school. I like, you know, low fees, transparent, tax efficient things that people can understand that presumably add value in the long game.

[Barry Ritholtz]

So let's talk about some of the block and tackling. Tom, once an ETF is created and launched, how do you think about what I think about as someone who was on a trading desk as good market behavior, meaning tight spreads, reasonable liquidity. Especially if the ETF is holding some assets that are perhaps a little less liquid than average?

[Wes Gray]

Yeah, that's a great question. And it creates a lot of confusion in the marketplace. And so what there are, there's basically two types of ETFs, one we'll call liquidity diamonds. These are ETFs that everyone knows, right? Like spy triple Q, where when you go and Transact in those ETFs, it's very likely that you're actually trading shares with someone else who actually owns those ETF shares. That's rare, right? Because it's just such a huge market. The other set of ETFs, which is 99.99% of them, is normal ETFs, where when you go access the marketplace, you're accessing what they call primary liquidity, which means you're asking a market maker to give you a bid ask spread. So the vast majority of that bid ask spread is simple to understand. What would it cost you as a trader to acquire or dispose of that basket of securities. So, and so for example, if I'm trading the triple levered Zimbabwe bitcoin swaps, well, my bid ask spread might be 10% wide. Where if I'm trading a basket That's S&P 500 stocks, even though the ETF maybe never trade but once a year we could trade a billion dollars of that ETF with a couple basis points of impact. So it just depends on the underlying basket liquidity.

[Barry Ritholtz]

You may notice I didn't ask an obvious question. Hey, do you go ETF structure or not? I think we all understand the advantages of this structure. Not only intraday liquidity, but no phantom capital gains taxes. But what might send us in a different direction? An sma, A mutual fund to trust. When is an ETF really not the right structure?

[Wes Gray]

Another great question. So ETFs unfortunately run ETF architects, so everything should be at an etf. Of course. Right. But you know, let's be honest here. The big disadvantages of the ETF structure are transparency and you cannot close an etf. So if we have a strategy where transparency is just not, you know, going to play favorably for my shareholders because I don't want to expose this to the world every single day, then obviously you can't do an ETF for all intents and purposes. The other one is capital constraints. So let's say we're trading the micro cap strategy and penny stocks where the maximum amount of capital that can go in there is called 50 hundred mil. Beyond that, I'm gonna start blowing the concept up. You cannot stop or close an etf. Whereas an SMA or mutual fund, obviously they have tools in which you can actually capacity constrain the capital you take on.

[Barry Ritholtz]

So the last question we have noticed, just a tremendous amount of flows are going to the big three. They, they go to blackrock, they go to Vanguard, they go to State street. And broad passive indexes have dominated a lot of the flows. The exception has been these kind of new, clever, unusual active funds that occasionally catch people's fancy. If you're thinking about creating an etf, what sort of space should you really be looking in? What sort of strategy is the best ETF alternative to the core of a lot of people's portfolios? The big indexes.

[Wes Gray]

Yeah. So I would basically focus on things that Vanguard or iShares can't do well, which is you can usually going to be very boutique, very niche strategies where it takes some special expertise to put those portfolios together and, or you can't jam a trillion dollars into the strategy, Right? So basically focus as be good at being a boutique because you're never going to beat Vanguard at delivering scale trillion dollar market beta. That's insanity. So anytime you have a strategy that Vanguard is not offering because it's either really complex, really differentiated, hard to explain, hard to build, hard to manufacture, or there's just not massive scalability, that's where you'd want to focus. If you can put a trillion dollars in your strategy without any breaks, it's. It's probably not going to work because Vanguard's already doing it and we don't want to compete with the monopoly.

[Barry Ritholtz]

So. So to wrap up, if you're an analyst or strategist or even fund manager and you have a unique idea that you think will do well in the market as well as well in the marketplace, you think others are willing to pay for it with their capital, consider launching your own ETF. You need about $25 million in assets and a cost of about a quarter million dollars annually. But the upside are potentially hundreds of millions or even billions of dollars in client assets. I'm Barry Ritholtz and this is Bloomberg's at the Money Carefully.

[Unknown Singer]

Mystery.