Seed Money 3

The problem  of Issuers  ETFs  finding seed money from Market Makers seems to have faded. With most new issues being seeded at between $2.5  and $5.0 million the amounts have helped solve the situation with these numbers being down from the $15 to $35 million per issue of several years ago.

Equally important is the fairly recent entrance into the seeding space of third party seeders who put up the initial seed in return for various incentives given back by the Issuers. These incentives can be in various forms including reciprocal business, Basis Points in the funds or straight interest on the amount invested in the initial seed.  There generally seems to be an agreed upon tie up period on the seed shares to avoid the Lead Market Maker being in competition with the party holding the seed shares. Of particular benefit to the new arrangement is that the party holding the seed shares is often willing to lend out the shares to the LMM who historically attempt to short shares to the public at a premium to the NAV. Our experience has been that the ability to borrow shares at very decent rates enables the LMM to offer Shares of the ETF at tighter spreads to the NAV. This benefits the public, enables the Issuer to grow its assets more quickly than when shares are difficult or impossible to borrow and therefor expensive to the LMM. This also provides further income to the party doing the seeding. In all a great improvement over the early years of ETF issuance.

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