For ETF issuers, success on day one often comes down to a single word: seed.
The challenge is that seed means two very different things depending on who you ask.
Some see it as an anchor investor ready to commit millions of dollars.
Others describe it as the initial ETF shares created by a lead market maker.
Both definitions are correct, but they are not interchangeable, and that overlap in language often leaves new issuers confused at launch.
“Seed is one of those words that gets thrown around in different contexts, and people often assume it all means the same thing. For us, clarifying that distinction helps demystify the process for clients.” – Sal Messina, AVP of Client Success Management at Tidal Financial Group
When Seed Means Inventory
For market makers, seed means initial inventory.
To get a fund trading, the lead market maker (LMM) contributes either cash, which the portfolio manager uses to buy securities, or securities in-kind in exchange for ETF shares. Those shares show up as the fund’s first assets under management.
But this is not permanent capital. The market maker is long ETF shares and short the underlying basket, which ties up balance sheet capacity and accrues financing costs. For the LMM, the goal is to pass those shares to investors quickly. Holding seed inventory is expensive, with costs tied to rates like SOFR plus a spread. No trading desk wants to carry that exposure for long.
“The common misconception is that seed always means outside capital. In reality, when the LMM creates initial shares, that’s also called seed. Those units show up as AUM, but they are very different from a cornerstone investor writing a check.” – Ryan Bader, VP of Capital Markets at Tidal Financial Group.
When Seed Means Investor Capital
While market makers treat seed as temporary inventory, issuers use the same word to describe something very different: lasting investor capital. On this side of the equation, seed refers to outside investor commitments, often in the form of a cornerstone account.
This is true AUM, not temporary inventory. Investor seed provides scale, helps validate the ETF, and enables the product to be considered by major platforms and advisors.
Without understanding this distinction, issuers risk talking past their partners. For managers looking to establish credibility, knowing who is providing what capital is essential.
Why Size Shapes Strategy
Complicating matters further, the right amount of seed depends on the type of fund being launched.
An equity ETF can often launch with just a few million dollars. Option-income strategies need larger commitments, since they must hold stocks while simultaneously writing derivatives. A municipal bond ETF holding thousands of securities may require ten million dollars or more simply to build a workable portfolio.
Consider a new municipal bond ETF with 3,000 holdings. A $1 million seed may technically get it listed, but it won’t provide enough scale to build a representative portfolio. Without larger commitments, the fund risks stumbling from day one.
Even with the right amount of capital, a launch requires both types of seed working together. Without one or the other, funds risk stumbling, either looking illiquid on the screen or lacking the scale to attract allocators.
This is also why choosing the right partner matters. A Muni bond ETF, for example, should not rely on an equity derivatives desk to provide seed. Matching product type to an LMM’s asset class focus is just as important as securing anchor capital.
How Tidal Bridges the Gap
For new issuers, navigating two meanings of the same word can be daunting. Tidal Financial Group helps clients manage both sides of the process:
- Sourcing the right LMM partner to seed the fund with proper execution quality.
- Advising on investor relationships to secure cornerstone commitments and reach AUM thresholds required by distribution platforms.
As a leading ETF and Services Platform, Tidal has the scale and industry network to align both pieces. By matching the right market maker to the product and guiding issuers on anchor capital, Tidal helps clients avoid the pitfalls of launch.
Seeding is not simply about listing a fund, it is also about creating a foundation for liquidity, distribution, and sustainable growth. With the right partners, issuers have the opportunity to turn a confusing hurdle into the cornerstone of a successful ETF.
