Grail Advisors took another stab at the actively-managed ETF space with the launch on January 29 of Grail McDonnell Intermediate Municipal Bond ETF (GMMB) and Grail McDonnell Core Taxable Bond ETF (GMTB) on the NYSE. Both had very light volume in their first public session.
Actively-managed exchange-traded funds are a relatively new innovation. Most ETFs are built around indexes whose constituent securities change only rarely, and typically with days or weeks of advance notice. ETF holdings are not supposed to change unless the index provider (which is always independent of the fund sponsor) makes a shift. This is often a positive feature, but there remain a gallant few who are convinced they can add value by taking a more active approach to portfolio management.
Enter the actively-managed ETF. Such funds have a manager who has discretion to change holdings at any time. The problem with this is that ETFs are liquid only to the extent buyers and sellers know what they are getting. The creation/redemption process simply doesn’t work if traders do not know exactly what is inside the portfolio. Managers, on the other hand, are usually reluctant to let the world know what they are doing – and with good reason. Short-term traders will always try to capitalize on such knowledge.
The solution to the dilemma is transparency. Actively-managed ETF managers have the freedom to change the portfolio as they wish within their specific mandates, but must disclose whatever they do right away. It sounds great in theory. As anticipated, however, real-world results are mixed so far.
The two new ETFs from Grail both focus on fixed-income niches that are already covered by other ETFs and mutual funds. Grail has outsourced portfolio management to a subadvisor, McDonnell Investment Management. With $13 billion in assets under management, McDonnell is no newcomer to the fixed-income world. We are not sure how their management of GMMB and GMTB will differ from whatever they do for other clients with similar objectives.
The Grail press release (pdf) makes a virtue of low costs for these ETFs, saying “Expenses for the Grail McDonnell Intermediate Municipal Bond ETF and the Grail McDonnell Core Taxable Bond ETF will be noticeably less than similarly-managed mutual funds. Both of the funds will limit their maximum expense ratios to 0.35% annually. By comparison, the average expense ratio for the Morningstar Municipal National Intermediate category is 0.92% and the average expense ratio for the Morningstar Intermediate Term Bond category is 0.96%.”
I have not verified these numbers but presume they are correct. My guess, however, is that bond fund investors who are looking for low expenses will not buy an “average” fund in each category. They will instead look for a low-cost fund and probably have no trouble finding one even cheaper than the Grail offerings.
Nonetheless, I applaud Grail for continuing to innovate. Perhaps they have a long-term business strategy and are willing to give their funds several years to prove their potential and attract significant assets. I hope so, otherwise GMMB and GMTB could easily go the way of other ETFs that were ahead of their time.
Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.