ETF seeding from Esposito Securities lies behind BOON and KNG ETF launches
Dallas, Texas-headquartered Esposito Securities is a US-registered broker dealer offering a wide range of services for the ETF industry as well as global equity trading and advanced options strategies.
The firm is known for its ETF seeding program which lay behind the end of February launch of the NYSE Pickens Oil Response ETF, a fund that traded 215,000 shares on its first day. Since going live, the fund has continued to see volume, averaging more than 50,000 shares traded per day. This week saw the launch of another ETF seeded by Esposito, KNG or the CBOE Vest S&P 500 Dividend Aristocrats Target Income Index ETF.
This CBOE Vest ETF is owned by the same parent company that owns ETF.com and the BATS exchange and is an ETF version of one of its mutual funds. KNG will track an index produced by CBOE that tries to give 3 per cent more income than the S&P 500 while also providing capital growth, through holding equities and selling call options.
Esposito founder and CEO Mark Esposito explains that he founded his firm 11 years ago and has been in the broking business for 26 years.
“I set up Esposito Securities because there was strong demand for value added products that bulge brackets and other firms may not provide,” he says. “Specifically, in the ETF space, we have provided high end ETF products and services.”
The firm’s core competency is equity trading domestically and in 50 countries worldwide.
“ETFs are the largest growth driver but we also work with mutual and closed end funds and all money managers,” Esposito says.
Esposito seeds new ETFs with roughly USD2.5 million. “It could be lower or higher,” he says. “The aim for us is to build client relationships over a number of years.
“Seeding ETFs gives us another business line in which we can add value to our clients. If we bring an ETF to the market, we support the issuer and their product.”
Relationships are key for Esposito. “There is usually a relationship ahead of time with an ETF sponsor we seed. We also see a lot of funds we don’t seed. More recently, some larger firms have stepped back from the business because they don’t want seeding capital on their balance sheet. That’s created opportunity for us.”
Esposito observes that it’s not always easy to find good partners, even with all the new ETFs coming to the market.
“We have money on the sidelines ready to build that business,” he says. “We would look at ETFs outside the US such as in Canada, and Europe is a natural fit for us but there are some barriers for us in terms of hedging.”
ETFs are chosen based on an analysis conducted by the risk and the management team.
“We need to be able to say ‘this is a stock we can hedge appropriately.’ We want them to have a good experience with us and be able to support the issuer and the shareholders.”
Another recent seeding was the award winning USD150 million AIEQ artificial intelligence ETF, powered by IBM’s Watson.
“We can seed anything from Dow Jones stocks to AI,” Esposito says. “The passive ETF landscape in the US still has outstanding opportunities, but the active space is where the business is. We expect to see more active funds are moving assets to an ETF wrapper.”