Masters in Business: At The Money – Building an ETF
Host: Barry Ritholtz (Bloomberg)
Guest: Wes Gray (ETF Architect, Alpha Architect)
Date: January 28, 2026
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.
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]
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]
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
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.
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.