Attrition Comes to the Active ETF Space

Includes: RPX, RWG
by: Shishir Nigam

The Active ETF space in the US is now starting to see some of the attrition that had long been expected to occur in this relatively new space. On August 20th, Grail Advisors announced in a press release that they will be shutting down two of their actively-managed ETFs – the RP Technology ETF (RPQ) and the RP Financials ETF (RFF). The closure of the funds was approved at a board meeting and the funds will be suspended prior to market open on Aug 30, 2010.

The closure of these funds makes them the first to be closed in the US Active ETF space, since the very first actively-managed ETF from Bear Stearns went down with the company in 2008. The RP Technology and the RP Financials ETFs were both launched in October 2009, as part of a group of 4 Active ETFs that also included the RP Growth ETF (NYSEARCA:RPX) and the RP Focused Large Cap Growth ETF (NYSEARCA:RWG). The two funds that are being closed had seen hardly any in flows since their launches, with both of them languishing around the $2.5 million mark, the majority of which is likely the seed capital that the funds started off with in the first place. Both funds had an expense ratio of 0.89% and RFF aimed to outperform the S&P Financials Index, while RPQ aimed to outperform the Nasdaq Composite. RPQ was able outperform its benchmark by a significant margin since inception, but RFF had a harder time and generally stuck quite close to the performance of its benchmark index.

Both funds were sub-advised and managed on a day-to-day basis by RiverPark Advisors, run by CEO and Managing Partner, Morty Schaja. He commented: “By all appearances, the marketplace is not ready for these sector funds. We’ve been pleased with the performance of the RP Technology ETF but flows have still been disappointing. I believe investors will be better served by incorporating the best ideas of these two sector funds into our RP Growth ETF offering.”

That might imply that RiverPark and Grail Advisors plan to push on with the RP Growth ETF for the time being, even though that fund has not tasted much more success than the two funds being closed. RPX’s assets stood at $3.96 million as of July 31, 2010. The CEO of Grail Advisors, Bill Thomas, also chose to direct attention to future possibilities, saying that: “With this move, we are dedicating our resources to the areas of most interest to investors, including the introduction of several exciting new funds in the coming months that will have broad appeal in the marketplace.”

Many such new funds are not profitable for fund companies until they cross a certain threshold in assets. The threshold to achieve that break-even is seen to be around $30 – $50 million, but for small scale players like Grail Advisors, that threshold is likely on the higher end of the range because they don’t benefit from the scale efficiencies that larger ETF manufactures like Invesco PowerShares have. At the moment, the largest of Grail Advisors’ seven actively-managed ETF is the RP Focused Large Cap Growth ETF with assets of only $6.65 million. So it is quite likely that each of Grail’s current offerings are loss-making propositions for the company. RiverPark, the sub-advisor to four of Grail’s ETFs, has filed with the SEC to launch its own actively-managed ETFs as well and has 3 different Active ETFs in the works.

Disclosure: No positions in above-mentioned names.

Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. None of the material above and elsewhere on EtfsHub is intended to endorse or promote any company or its products. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.