Grail Plans Actively Managed Bond ETFs

by on October 6, 2009 | ETFs Mentioned:

Earlier this year, San Francisco-based Grail Advisors broke onto the actively-managed ETF scene with the launch of its highly anticipated Grail American Beacon Large Cap Value ETF (GVT). After the follow-up launch of four additional ETFs last week, Grail is moving ahead with plans for two actively-managed fixed income ETFs. The proposed funds, both of which would be managed by McDonnell Investment Management, are:

  • Grail McDonnell Intermediate Municipal Bond ETF
  • Grail McDonnell Core Taxable Bond ETF

San Francisco, Home of The Trailblazing Grail AdvisorsSimilar to traditional actively-managed bond funds, the proposed ETFs would allow portfolio managers unrestricted trading, but with the benefits of the exchange-traded structure. “Our stated goal has been to bring a full lineup of traditional, active fund managers and strategies to the ETF marketplace,” said William M. Thomas, CEO of Grail Advisors LLC, in a press release. “These new fixed-income ETFs, both very important additions to our actively-managed list.”

Invesco PowerShares launched the first actively-managed bond ETF, the PowerShares Active Low Duration Fund (PLK) in April 2008. PLK, which seeks to generate alpha over the Barclays Capital 1-3 Year U.S. Treasury Index, has year-to-date returns of 0.8%, while the passively-indexed iShares Barclays 1-3 Year Treasury Bond Fund (SHY) has lost about 0.8% on the year. Despite this stellar performance, the actively-managed bond ETF concept has been slow to catch on among investors. According to data from the National Stock Exchange, PLK had total assets of only about $6 million as of September 30.

Floodgates Opening?

Ever since PowerShares introduced its line of actively-managed ETFs in 2008, this “hybrid” product has been widely expected to gain significant traction among investors. Passively-indexed ETFs have attracted hundreds of billions of dollars in assets from investors disillusioned with expensive active management that fails to consistently generate excess returns. But for investors who believe in the return enhancement possibilities of active management, the ETF structure can still offer material benefits, including reduced expenses and increased tax efficiency.

Since PowerShares pioneered the actively-managed ETF in 2008, the space has been relatively slow to develop. But in recent weeks, it’s shown signs of life. Besides Grail’s four new ETFs, AdvisorShares made its entry into the ETF industry with the launch of the Dent Tactical ETF (DENT), a product that relies on a team of managers trends in U.S. and global economies through demographic analysis and anticipated changes in consumer spending patterns.

Several other issuers are expected to launch actively-managed ETFs in the coming months as the lines between traditional mutual funds and exchange-traded funds continues to blur. Pimco has filed for actively-managed municipal bond ETFs, while earlier this year iShares filed for approval on two actively-managed ETFs, including one bond and one equity fund. To stay up to date on all the developments in this exciting corner of the ETF industry, sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.