The “Next Step in ETF Evolution”

by on May 4, 2009 | Updated May 14, 2009 | ETFs Mentioned:

The Grail American Beacon Large Cap Value ETF (GVT), the first actively-managed ETF whose managers actually select its stocks, began trading on the NYSE today. While other ETF sponsors (most notably PowerShares) have been offering actively-managed ETFs for over a year, GVT is different from these “first generation” actively-managed funds in many ways. Most significantly, existing actively-managed ETFs make stock picks based solely on proprietary computer models. The Grail fund will have a “human touch,” as its managers will have the discretion to invest in a wider variety of stocks without being tied to an underlying index or computer model.

Many Interested Observers

ETF providers have been seeking a way to introduce actively-managed ETFs for years, believing that the cost advantages (GVT will charge fees equal to 0.79% of assets, compared to 1.4% fee for typical stock mutual funds) and potential tax efficiencies would attract mutual fund investors in droves. To this point, the major hurdle preventing a flood of actively-managed ETFs from entering the market has been the SEC’s disclosure policy, which requires ETFs to disclose their holdings on a daily basis (as compared to four times annually for mutual funds). Fund managers fear that traders would use this information to engage in “front-running” the ETFs, essentially increasing the cost of stocks when the ETFs are looking to buy and depressing prices when managers are looking to sell.

William Thomas, chief executive of Grail Advisors LLC declared the lanuch of GVT to mark “the next step in ETF evolution.” However, skeptics are not convinced that this new hybrid investment vehicle will be able to attract sufficient assets or overcome the difficulties posed by the stringent disclosure requirements. What is certain is that many interested observers in the ETF industry will be monitoring the success of the Grail fund very closely. Stay tuned…