The rise of celebrity-backed ETFs has caught the attention of advisors and investors alike. Over the past few years, prominent analysts, economists, and strategists have launched their own exchange-traded funds, leveraging their reputations to carve out space in an increasingly crowded market.
Take Nouriel Roubini, the renowned NYU professor known as "Dr. Doom," who launched the Atlas America Fund (USAF). Or Dan Ives, Wedbush’s tech and AI stalwart, who has channeled his bullish calls into the AI Revolution ETF (IVES). Even Tom Lee, co-founder of Fundstrat and former JPMorgan equity strategist, entered the fray with the Granny Shots US Large Cap ETF (GRNY).
These high-profile funds are part of a broader wave: in 2024, a record-breaking 723 ETFs debuted, competing for assets and visibility among thousands of established options. While a strong personal brand may attract initial attention, advisors should understand that the long-term viability of an ETF hinges on much more than its founder's name or early buzz.
The Cost of Entry: Steep but Necessary
Launching an ETF is an expensive endeavor. Firms typically incur $50,000 to $100,000 in SEC filing fees, though estimates from ETF.com suggest that costs can climb as high as $500,000, depending on the fund’s complexity. Additional fees apply for listing the fund on exchanges like the NYSE or Nasdaq, with initial listing costs often accompanied by annual renewal fees. Nasdaq, for instance, charges an annual listing fee of $4,000 per fund.
But these are only the beginning. Zachary Evans, an analyst at Morningstar specializing in passive strategies, explains that operating costs add up quickly. Teams for trading execution, compliance, risk management, marketing, and sales all need to be staffed and funded. Add to this the costs of office space and other overhead, and the operational budget for even a modest ETF can exceed $200,000 annually.
For advisors evaluating ETFs for clients, understanding these expenses provides critical context. Expense ratios are the primary revenue source for fund providers, meaning ETFs must accumulate significant assets under management (AUM) to sustain operations.
Breaking Even: Performance and Scale
To illustrate the financial dynamics, consider a hypothetical ETF with a 50-basis-point expense ratio and $200,000 in annual operating costs. Evans notes that such a fund would need at least $40 million in AUM just to break even.
Performance plays an essential role. If the ETF's value rises 20% in a year, the fees it collects also increase proportionally. Yet, even stellar performance might not guarantee survival if AUM remains low or investor interest wanes.
This challenge becomes especially acute when seed money is involved. Seed investors often agree to lock up their capital for two or three years, providing initial liquidity and credibility. However, if these early backers withdraw after the lock-up period and the ETF hasn’t attracted sufficient additional investors, the fund’s future could be in jeopardy.
The Reality of Fund Closures
The growth of the ETF market has been accompanied by a notable increase in fund closures. In 2023, over 200 ETFs were shut down—a record—and nearly as many followed in 2024. Most closures stem from insufficient AUM or underperformance, reinforcing the high stakes for new entrants.
"As new products launch, others inevitably exit the market," Evans observes. "The majority of closures result from failing to generate the necessary asset levels or performance to sustain operations."
For advisors, this underscores the importance of rigorous due diligence when selecting ETFs. While a high-profile launch may capture headlines, the fund’s long-term viability depends on its ability to deliver consistent value, attract sustained investor interest, and manage costs effectively.
What This Means for RIAs
For wealth advisors and RIAs, the explosion of ETFs presents both opportunities and risks. On the one hand, the proliferation of specialized funds offers a growing array of tools to tailor client portfolios. On the other, the rapid pace of launches—and closures—requires a discerning eye.
When evaluating ETFs, consider not just the strategy and branding but also the fund’s structural underpinnings. Does it have the scale to sustain itself? Is the expense ratio reasonable given its performance history? What is the likelihood that it will remain viable in the face of market challenges?
Moreover, think critically about the role of celebrity-backed funds in client portfolios. While these ETFs may appeal to clients intrigued by a familiar name or a compelling theme, they should ultimately meet the same rigorous standards as any other investment option.
Navigating the Crowded Market
In a competitive landscape, advisors can add value by guiding clients toward ETFs that align with their financial goals and risk tolerance. This requires staying informed about market trends, understanding the mechanics of ETF operations, and being prepared to pivot if a fund fails to deliver on its promises.
As ETFs continue to evolve, wealth advisors have a unique opportunity to help clients navigate the complexities of this growing market. By focusing on fundamentals and maintaining a client-first approach, you can turn the proliferation of options into a strategic advantage.
