How To Create Your Very Own ETF

How to Start an ETF

Many beginning investors face two key questions when determining where to invest their hard-earned dollars: how much disposable or investable assets are available, and which investments to choose when building a portfolio. When it comes to deciding where to invest their hard-earned dollars, investors can browse a range of options, from mutual funds to exchange-traded funds (ETFs), stock purchases, and more. However, many advanced investors with predilections towards certain companies, industries, or regions have asked: How do you create your own ETF?

Creating an ETF: Considerations

For starters, anyone who is thinking of how to start an ETF needs to realize that this is a big-ticket wish: starting an ETF requires upwards of $100,000, up to a few million dollars of seed money in order to kick off the fund.

To create your own ETF, you will need to carefully consider which assets to include in your fund. If you are planning on including mostly large-cap stocks from companies such as Google and Apple, you may be better off putting your money in a fund that tracks the S&P 500 or other popular ETFs that track the stock market at-large. This means that those looking to seed their own ETF need to have a really clear-cut reason to invest in certain funds. Be prepared to learn new vocabulary and discover lots of advice and information on investing.

At some point, you must also select the class of assets that best suits your investment needs. In other words, what percentage of your investable assets should be allocated toward bonds instead of stocks, or bonds instead of real estate? Once you determine your asset allocation, then you have to determine which type of investment accounts to set up: a brokerage and/or a retirement account. Investments are either tax-deferred or tax-exempt in retirement accounts, whereas all gains and losses are a yearly taxable event in a regular brokerage account.

As you have probably gleaned so far, these are serious financial decisions that shouldn’t be taken lightly. Diversification is another buzzword or tenant of investing that is familiar to most people. Generally, ETFs are highly diversified investments with many assets of the same class or even a mix of stocks and bonds. As a result, rather than going out and researching stock sectors and recommended asset allocations, you can simply find an ETF that meets your investment needs. For example, if you have an interest in just buying an ETF that mirrors the overall market indices, you could purchase the SPDR S&P 500 ETF (SPY). SPY is also already pre-weighted, so the largest companies make up a larger portion of the investment fund than smaller ones. This built-in feature alleviates concerns about appropriately balancing investments according to company size.

Platforms to Create Your Own ETF

For investors ready to dive into creating their own ETF, they can choose companies like ETF Managers Group and Exchange Traded Concepts to get started. Alpha Architects allows ETF creators to use its technology platform to create their own white-label ETFs.

Motif Investing, one of the original companies that enabled ETF creation, announced it was closing its doors in May 2020.

The Bottom Line

Investing can be a daunting task. Assessing your overall financial situation and then selecting the right investments given a variety of factors requires some thought. Exchanged-traded funds are a good choice for beginning investors given their ease of transaction, high liquidity, and relatively low cost of ownership. Whether investing in an existing ETF or creating your own–after considerable capital is accumulated and considerations made–selecting an ETF as a core investment vehicle makes sense for a lot of investors.