In what could be the first step in creating increased competition in a still relatively small Active ETF space, Grail Advisors launched two new actively-managed ETFs – the Grail McDonnell Intermediate Municipal Bond ETF (GMMB) and the Grail McDonnell Core Taxable Bond ETF (GMTB), on January 29, 2010 on the NYSE.
GMMB competes directly with PIMCO’s MUNI
Grails’ Intermediate Municipal Bond ETF (GMMB: 51.90 0.00%), will compete directly with PIMCO’s Intermediate Municipal Bond Fund (MUNI: 52.28 0.00%) which was the second of two Active ETFs launched by PIMCO. MUNI was launched on November 30, 2009, so being second market with a largely identical offering is not going to help the cause of Grail Advisors. However, MUNI has yet to gain significant traction in the market as its market cap is still only around $13 million, 2 months after its launch. That’s where GMMB’s opportunity lies as it will try to attract investors with a slightly more flexible and aggressive investment strategy used by their sub-advisors – McDonnell Investment Management.
With Grail’s GMMB benchmarked against the Barclays 3-15 Year Municipal Bond Index, it is likely to have a slightly longer duration and average duration than PIMCO’s MUNI which is benchmarked to the Barclays Capital 1-15 Year Municipal Bond Index. Also, GMMB provides more leeway for its portfolio managers to strive for return by allowing them to invest 20% of their portfolio in high yield debt and another 20% in US$ taxable debt securities such as US government/agency debt, corporate debt, mortgage and asset-backed securities and even ETFs. This could well allow GMMB to beat its benchmark by a bigger margin than MUNI, but that doesn’t appear to be the case historically, as the prospectus highlights the performance of a comparative “composite” portfolio managed by McDonnell, which has underperformed the Barclays benchmark since inception and also in the last 1-yr period. Of course, past performance is no indication of what’s to come. GMMB’s expenses are currently capped at 0.35% (the same as MUNI) but may rise to 0.58% after January 31, 2011, after the contractual agreement ends.
GMTB enters the medium-long term bond space
In contrast, Grails’ Core Taxable Bond ETF (GMTB: 52.09 0.00%), enters a relatively uncluttered space, at least within the Active ETF market. All the actively-managed bond ETFs so far, other than MUNI and GMMB, have been targeted at the short maturity bond market, with a low duration fund from PowerShares (PLK: 25.53 0.00%) and another from PIMCO (MINT: 100.78 0.00%) – with 3 more upcoming short maturity ETFs planned by PIMCO. Hence, GMTB enters the medium-long term bond space unchallenged with the fund’s average duration expected to be between 3-6 years. GMTB is benchmarked against the Barclays Aggregate Index which covers the US investment grade, fixed-rate bond market. However, just like GMMB, McDonnell is allowed more flexibility as it can invest up to 20% of the portfolio in high yield securities and also invest in other ETFs and money market funds. Likewise, GMTB’s expenses are also capped at 0.35% with the possibility of rising to 0.58% after January 31, 2011.
Game On!
By launching offerings that compete with PIMCO’s products, Grail Advisors has taken on a huge competitor in the fixed-income space. The reputation that PIMCO brings with it from fixed-income management will be hard to beat, but even they are new to the Active ETF space, so the next few months will be keenly watched to see whether Grail’s new offerings gain traction. Game on!
Read the details on both ETFs here:
IN FOCUS: Grail McDonnell Intermediate Municipal Bond ETF (GMMB)
IN FOCUS: Grail McDonnell Core Taxable Bond ETF (GMTB)
Disclosure: No positions in any names mentioned.
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