How to Start an ETF or Mutual Fund

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Have you wondered how to start a mutual fund or ETF? It's not easy, or cheap. But a new broker allows you to create your own mini-ETF. Learn which one here.If you’re searching the internet for information on how to start an ETF or mutual fund, chances are you’re more curious about starting one than serious.

New mutual funds and ETFs are usually started by the big existing fund companies.

Government regulation and legal hurdles make the learning curve steep. Starting either would certainly require significant upfront capital costs.

But what if you could start something similar to a mutual fund or ETF, without all the regulatory hassle and upfront expenses? What if it was free?

Do you want to choose your own portfolio of stocks, then allow family, friends or other individual investors to follow your strategy? 

Well, there’s a commission-free online broker that allows you to do that. It’s called M1 Finance. I’m using it today to create my own “Pies which I can allocate however I want.

What I like most is being able to create my own mini-ETF for whatever theme I want to invest in. Then invest your money commission-free.

You can also share your pies with friend and family, allowing them to invest in the same investments. 

Check out M1 Finance to see how it works. It’s a more intuitive and low-cost way to invest. 

Read more: M1 Finance Review

How to Start a Mutual Fund (a real one)

To start a mutual fund, you must be a registered investment adviser (RIA). Becoming a RIA involves first passing the Series 65 test, then registering with the SEC or state you plan to operate in.

Many candidates for a RIA come out of investment advisory firms. It’s a long a complicated process, only to be pursued by those who have made investment advisory their career choice.

If you’re not working for a company that already has mutual funds, a few firms specialize in bringing new funds to market. For a healthy fee, these advisory firms will step you through the complicated regulatory process.

You’ll need to hire a specialized firm or a team of legal advisers and pay the associated costs both to start it up and for maintenance. Then, of course, you’ll need to set out your fund’s objectives and investment strategy.

So on top of focusing on choosing stocks for the fund, the compliance aspect of a mutual fund is rigorous and you’ll most certainly need help. That help costs money, so you’ll need plenty of investor assets to cover the costs. That will take additional investments in staff and marketing.

Read more: Individual Stocks vs. Index Funds – Why I Choose Both

How to Start an ETF

Starting an ETF is difficult too. Like mutual funds, ETFs require large upfront costs and the knowledge of how to navigate legal and regulatory mazes.

Again, going to work for an investment advisory firm that has already created ETFs is your best bet if you’re young and starting a career. Find a mentor and put in the time to learn the ropes. Then go off on your own. That’s one traditional way to approach it.

According to this Nasdaq article, starting an ETF from scratch would cost you $750,000 to $1.25 million. And that’s just to get up and running. You’d still need to hire staff, manage the fund, maintain compliance requirements, and market the ETF to get customers.

However, in recent years, the cost to start and ETF has dropped significantly due to the rise of so-called white-label firms. These companies have previously created ETFs and possess the know-how, infrastructure, and understand all the compliance issues. They can then help you create a “private-label” ETF.

Think of white-label firms like a private-label food package company. Your local grocery store may put their name on a food item and sell it for less than the brand name. Private label food makers handle all the food production but put the grocer’s label on the can or box. Or remember generic food?

One of the biggest of these white-label ETF firms is Exchange Traded Concepts. Check out their website to understand more about what they do.

White-labels can bring the cost of starting an ETF down to closer to $100,000. Of course, there’s always ongoing fees to run a fund and further investment would be required (office space, staff, computers etc.). But if you’re looking to start a real ETF, researching the various white-label companies may be a good place to start.

Conclusion

Knowing that the SEC and government are heavy-handed with all the regulation and compliance, it’s not surprising to learn that starting a mutual fund or ETF is no easy or inexpensive task.

I used to be curious about starting something for my parents to invest in but never had the tools to do it. Well, now that I invest with M1 FinanceI can create mini-ETFs and allow anyone to invest in them.

The user experience is seamless too. None of the bloated old-school websites that many traditional brokers use. It’s a modern take on investing made simple.

Have you ever considered how to start an ETF or mutual fund? 


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