Grail to Launch Active Single-Manager ETFs: Leader of the Pack

Grail Advisors, LLC, the investment advisor that launched the Grail American Beacon Large Cap Value Fund (GVT) last month, has filed with the SEC to launch four additional ETFs. Grail notes that these four funds will be the first actively-managed ETFs to use a single-manager approach. The proposed funds are:

• RP Growth ETF: Will use "a fundamental research driven approach to identify those industries and companies with the strongest growth prospects for revenue, earnings and/or cash flow over the medium and long term."
• RP Focused Large Cap Growth ETF: Will invest in companies with a market cap in excess of $5 billion, generally holding equities of between 20 and 30 companies.
• RP Technology ETF: Will invest in companies engaged in communications, software, computer services, internet, television, and semiconductor industries.
• RP Financials ETF: Will use a fundamental research-driven approach to invest in financial companies with a market cap in excess of $2 billion.

Grail hopes that the four funds would begin trading September 1 on the NYSE Arca Exchange. According to the filing, all four ETFs would charge an expense ratio of 0.89%. This fee is significantly higher than passively-indexed ETFs (many of which maintain expense ratios as low as 0.10%), but a decent amount below the mutual fund industry average (approximately 1.4%).

"A Lot Sooner Than Imagined"

Unlike traditional ETFs, managers of these funds will have discretion on a daily basis to choose securities consistent with the ETF's objective. With the launch of these funds, Grail will establish itself as the leader in the actively-managed ETF arena.

"Our goal from the outset was to bring traditional, active fund managers to the ETF marketplace," said William Thomas, chief executive of Grail Advisors. With these funds, that day has come "a lot sooner than even the most enthusiastic proponent of the ETF structure could have imagined."

As an enthusiastic proponent of the ETF structure myself, I couldn't agree more with Mr. Thomas. I recently wrote about the difficulties that Grail's first fund has encountered since its May launch.

Despite slightly outperforming its benchmark, GVT has experienced several zero-volume days and is yet to post daily volume above 5,000 shares. Despite these issues, Grail obviously believes that the market is ready for more actively managed funds.

And despite my concerns about the volume its existing fund is generating, I don't disagree with their strategy. The actively-managed ETF scene is showing signs of taking off, with WisdomTree announcing this week its plans to launch several actively-managed hedge fund ETFs.

By establishing several funds targeting various investment strategies and sectors, Grail is solidifying its place as the dominant player in the space.

While I am a firm believer in the benefits of traditional ETFs, I also anticipate that the "hybrid" structure will become tremendously popular in coming months, as investors embrace the advantages of the ETF structure but continue to seek out excess returns.

If it does, Grail has ensured its place (at least for now) as the leader of the pack.

Disclosure: No positions.

Comments

[searcher:]

Look for 'branding' of figurehead 'managers' at the masthead for these marketing experiments. Expect no better performance than that of the mutual fund industry as a whole. It will be intreresting to see how these 'up to the minute' funds are gamed by traders.

Jun 10 12:00 PM

[StreetMedic:]

Here's the problem with actively managed anything -- where is the proof it works over the long term? For the VAST majority of investors, there are some fundamentals that cannot be ignored:
1. You are not as smart or as talented or as savvy as you think. Timing the market, rotating sectors or stock is really really hard even for the best traders.
2. Most fund managers would be well served by understanding item 1.
3. Compared to their passively managed, low fee counterparts, actively managed funds (and their associated higher fees) do not generate better returns.
4. The whole idea of ETF began with the indexing idea. This is a stab at mutual funds. The difference, however, is that for most investors, mutual funds can be had for no transaction fees.

.89% is a lower than average fee ratio for some mutual funds, but factor in the transaction fees paid on the ETF purchases and it adds up.

If you want actively managed funds, or even passively managed funds, most investors would be wise to head for Vanguard or DFA funds.

The advantage of ETFs is their low fees and transparency. Actively managed ETFs remove the low fee part of the benefits.

Jun 10 12:36 PM

[Distressed ...:]

I don't get why people aren't just going to covestor and following performance..

Jun 10 12:44 PM

[discov:]

people aren't going to covestor, because most of the managers there only have 6 months or so of a track record.

Jun 10 11:49 PM