San Francisco-based Grail Advisors is set to expand its presence in the actively-managed ETF space, introducing four actively-managed ETFs later this week: RP Growth, RP Focused Large Cap Growth, RP Technology, and RP Financials. The new funds will join Grail’s existing actively-managed ETF, the Grail American Beacon Large Cap Value ETF (GVT), which launched earlier this year. Similar to GVT, the funds expected to be launched Thursday will be backed by investment teams that select individual holdings and weightings, a sharp departure from tactics used by the vast majority of exchange-traded products.
Most ETF assets are invested in passively-indexed funds that seek to match, not beat, the performance of well known domestic and international benchmarks across various asset classes. ETFs initially became popular among investors because they offered a stark contrast to traditional actively-managed mutual funds, eschewing costly searches for excess returns in favor inexpensive “index tracking.”
But in recent years, the lines between ETFs and mutual funds have been blurred. A handful of Chicagoland ETF issuers, Invesco PowerShares, Claymore, and First Trust, have developed dozens of exchange-traded products that track “intelligent” or “enhanced” indexes, benchmarks that implement quantitative analysis and screening methodologies to determine their holdings. The Claymore Raymond James SB-1 Equity ETF (RYJ), for example, tracks an index composed of stocks rated “strong buy 1″ by Raymond James & Associates.
In April 2008, PowerShares pioneered the actively-managed ETF space, introducing a line of four ETFs that don’t seek to replicate the performance of a specified index, but rather to outperform a benchmark. The performance of these ETFs is measured against indexes including the Nasdaq 100, S&P 500, and the Russell Top 200. PowerShares added a fifth actively-managed ETF (PSR) in late 2008 that invests in REITs. These actively-managed ETFs were initially bound by limitations on trading frequency and timing, but such restrictions have since been lifted.
GVT was the first ETF to allow its managers discretion in determining ETF holdings, freeing itself from compliance with rules-based methodologies (although quantitative analysis likely continues to be a major part of the stock selection process).
Threat To Mutual Funds?
Actively-managed ETFs remain relatively small in number and assets under management. Yet they pose a formidable challenge to mutual funds that have dominated the investment landscape for decades. “While ETFs already have claimed a substantial chunk of index-tracking assets, their foray into active management strikes at the more profitable core of the mutual-fund business,” writes Eleanor Laise.
The new Grail ETFs will have an expense ratio of 0.89%, well above the fees for both traditional passively-indexed ETFs (which can go as low as 0.09%) and funds that use quantitative analysis to determine holdings. But most actively-managed ETFs are still far cheaper than comparable mutual funds, which can charge expenses well above 1%.
Disclosure: No positions at time of writing.