Grail Launches Two Active Bond ETFs

by on January 29, 2010 | ETFs Mentioned:

Grail Advisors, known in the ETF world as the issuer responsible for the first actively-managed ETF that allowed managers total discretion, announced today the launch of two actively-managed fixed income ETFs. The Grail McDonnell Intermediate Municipal Bond ETF (GMMB) and the Grail McDonnell Core Taxable Bond ETF (GMTB) began trading on the NYSE Arca Exchange on Friday, bringing the total number of ETFs in Grail’s product line to seven.

Grail Advisors will serve as the manager for both funds with Chicag0-based McDonnell Investment Management sub-advising both funds. The muni bond ETF will seek outperform the Barclays Capital 3-15 Year Municipal Bond Index by identifying opportunities among states, sectors, securities, and exploiting the changing shape of the yield curve. The taxable bond ETF will be an actively-managed alternative to existing total bond market funds. GMTB is benchmarked to the Barclays Capital Aggregate Bond Index, which is also linked to total bond funds from Vanguard (BND) and iShares (AGG).

Both new funds will charge a net expense ratio of 0.35%, extremely low for an actively-managed ETF. But this cost structure still leaves a big “alpha gap” that must be filled in order to be competitive with passively-indexed competitors. BND charges just 0.14%, meaning that GMTB must consistently beat its benchmark by 20 basis points per year. The iShares S&P National AMT-Free Municipal Bond Fund (MUB) charges 0.25%, essentially putting GMMB in a 10 basis point hole from the start.

Slow Start For Active ETFs

Grail broke on to the ETF scene last year with the launch of the Grail American Beacon Large Cap Value ETF (GVT), the first actively-managed ETF to allow manager discretion in the selection of holdings (PowerShares launched a line of active ETFs in 2008 that utilize proprietary stock-ranking methodologies to determine holdings). At the time, the “Grail Fund” was touted by many in the industry (including ETF Database) as a gamechanger that would open the floodgates to a wave of active ETFs.

Grail ETF Assets
Ticker Inception Assets ($M)
GVT 5/09 $3
RPX 10/09 $3
RWG 10/09 $3
RPQ 10/09 $3
RFF 10/09 $3
Source: December NSX Data

But the market’s reception of actively-managed ETFs equity has been been tepid. At the end of 2009 GVT had only about $3 million in assets, as did four other actively-managed funds launched in October.

Active ETFs in the fixed income space have seen much more success. PIMCO introduced two actively-managed bond funds last year, including a short maturity strategy fund (MINT) and muni bond fund (MUNI). These ETFs took in about $50 million in cash in 2009, and have continued to grow this year.

Of course part of PIMCO’s success is attributable to the bond giant’s reputation and market leader status, something Grail’s funds won’t necessarily have. McDonnell has a long and impressive track record in the bond management business, but the name doesn’t carry the same weight as PIMCO in the investment community.

The addition of GMMB and GMTB brings the total for new fund launches in January to 23, putting the industry on pace to more than double last year’s new product output. See a summary of all the month’s fund launches and sign up for the free ETF newsletter to get updates on all new ETF launches.

Disclosure: Long BND.