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Janus Capital Files For Active ETFs

Shishir Nigam — Thu, 09 Sep 2010 11:00:27 +0000

Janus Capital Management, the Denver-based investment manager, filed with the SEC on Sept 3^rd, requesting for exemptive relief to launch actively-managed ETFs. The funds, if granted relief, will be allowed to invest in equities, fixed-income securities in both domestic and foreign markets. The ETFs will also be allowed to invest in other funds if Janus’ “fund-of-funds” relief is approved. As with all Active ETFs in the US, the funds will provide complete transparency of their holdings.

Like most other fund companies, Janus’ filing casts a wide net allowing the company the flexibility to start off with any investment strategy they see fit for their initial funds. As of now, their investment objective is just to “seek long-term growth of capital and current income”. The application also allows Janus to hire external sub-advisors to lead the day-to-day management of the funds. However, the description of the initial funds clearly points out that they will not invest in derivatives such as swaps, options or futures. That should help Janus avoid increased scrutiny from the SEC that many ETF applications have been subject to, since the SEC launched its investigation into derivative usage in ETFs in March.

Janus Capital Group, the parent company of Janus Capital Management, managed $147.2 billion in assets as of June 30, 2010. Janus Capital focuses on employing fundamental, bottoms-up research in its investment process and currently provides access to various equity, income and alternative mutual funds. Janus joins a long line-up of mutual fund firms that have filed applications with the SEC to launch actively-managed ETFs – these include the likes of Legg Mason, Eaton Vance, T. Rowe Price and John Hancock.

Disclosure: No positions in above-mentioned names.

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PIMCO Ranks Fourth In ETF Advisor Loyalty

Shishir Nigam — Wed, 08 Sep 2010 11:00:50 +0000

PIMCO was ranked fourth amongst ETF providers in advisor loyalty by a report that also had Vanguard coming in on the top of that ranking, followed by iShares and State Street’s SPDRs. The report was produced by Cogent Research, a Cambridge-based research firm, in August and was called the 2010 Advisor Brandscape^TM.

Vanguard displaced iShares from the top spot which it occupied in 2009, while State Street maintained its 3^rd place ranking. However, the surprise entrant was PIMCO, given that it is a relatively new player in the ETF space and had only $1.4 billion in assets at the end of August. PIMCO’s actively-managed ETFs held about 41% of those assets in 3 different Active ETFs, the largest one of which was the Enhanced Short Maturity Fund (MINT: 100.78 0.00%), holding $517 million in assets. PIMCO was not in the rankings at all in 2009, which makes its fourth ranking all the more impressive.

The report is based on a survey of 1,560 investment advisors from which Cogent Research calculates a standardized loyalty metric called a Net Promoter® Score (NPS^SM), based on which the ranking is established. Advisor loyalty is measured on metrics such as market penetration, level of commitment and share of wallet.

PIMCO’s ranking amongst the ETF providers underscores the power behind its brand name. PIMCO, like Vanguard, has a huge reputation in the fund industry especially because of its prowess in the fixed-income market. And that appears to have carried over into the ETF marketplace as PIMCO’s new ETF offerings, both passive and active, gain traction. This is definitely encouraging for other large mutual fund players who in recent months have also filed with SEC to launch various actively-managed ETFs. These include the likes of Legg Mason, Eaton Vance, John C. Hancock and T. Rowe Price – all of whom garner a lot of respect in the mutual fund world, and given PIMCO’s successful transition into ETFs, can also count on their strong brands in giving them a head start.

Disclosure: No positions in above-mentioned names.

AdvisorShares Withdraws Application For Emerald Rock Active ETFs

Shishir Nigam — Tue, 07 Sep 2010 11:00:23 +0000

On September 3^rd, AdvisorShares, the Bethesda, Maryland based provider of actively-managed ETFs, filed a withdrawal request with the SEC to withdraw the registration for two Active ETFs – the Emerald Rock Low-Priced Focused Growth ETF (LOWP) and the Emerald Rock Dividend Growth ETF (DIVI). No reasons were specified for the withdrawal other than that the company decided not to pursue registration of the securities at this time.

AdvisorShares had filed an amended 485POS document with the SEC in June of this year which included a preliminary prospectus for the two funds. The funds were to be sub-advised by Emerald Rock Advisors, which was founded in Nov 2009. LOWP was intended as an actively-managed fund that would focus on small-cap securities, specifically those priced below $35/share and having a market cap below $500 million. In contrast, DIVI was intended to invest in strong, dividend paying companies and would have looked to outperform the total return of the S&P500.

Despite the withdrawal of these two funds, AdvisorShares still has three actively-managed ETFs that are still under filing with the SEC, each one with a different sub-advisor. In the past year, two new funds have made it to market from AdvisorShares’ pipeline – the Mars Hill Global Relative Value (GRV: 25.15 0.00%) and the WCM/BNY Mellon Focused Growth ADR (AADR: 26.30 0.00%). Of these, GRV in particular has tasted some success, quickly becoming the largest actively-managed equity ETF in the US as it stood at about $43 million in assets, at the end of August.

Disclosure: No positions in above-mentioned names.

Major Moves Aug: New Listings Fly High, Others Stagnate, Filings Slow

Shishir Nigam — Wed, 01 Sep 2010 11:00:52 +0000

August, a typically slow month for North American markets marking the end of the summer, ended with the general equity markets working up losses over the period. The S&P500 lost about 4.7% over August as the market bounce that we saw in July fizzled out. No doubt that poor housing and employment numbers in the US had lots to do with this as investors have been forced to re-test their faith in the recovery time and again.

The Active ETF space in the US over the past month ramped up and garnered a significant amount of assets, but again the growth was driven primarily by just a few names. August also saw the number of new filings for actively-managed ETFs slow down, with fewer new players announcing plans. However, considering that there are currently 25 different issuers with plans for actively-managed ETFs which are backlogged with the SEC, one would have to say that the bottleneck definitely lies at the SEC. This was confirmed in an interview with Patrick Daugherty, who spoke of “Paralysis at the SEC”. We did see more conversion plans announced though, this time with Claymore announcing plans to convert two passively-managed bond ETFs into actively-managed ETFs. We also started to address the basics with regards to actively-managed ETFs to help new investors with our Active ETF Basics series. August also marked the closure of two Active ETFs from Grail Advisors and RiverPark, which are the first actively-managed ETFs to shut down since Bear Stearns’ very first Active ETF went down with the company in 2008.

Fund Flows:

(Click table to enlarge)

The US Active ETF space saw its assets grow by more than $400 million, but the growth was concentrated in a few names and majority of the funds in the space continued to be overlooked by investors. All in all, the total asset base reached $2.2 billion at the end of August, still below the May high. As has become the norm, PIMCO’s Enhance Short Maturity Fund (MINT: 100.78 0.00%) served as a barometer for market sentiment, being directly related to investor fears. As the market fell back in August, investors looked to take risk off the table and go into cash. And in doing so, they helped MINT bolster its asset base up to $517 million, still nowhere close to the $770 million high from May, but an significant rise from the $333 million the fund had at the end of July.

However, the biggest magnet for assets in the Active ETF space, was WisdomTree’s just launched actively-managed ETF – the WisdomTree Emerging Markets Local Debt Fund (ELD: 50.9064 0.00%). In the span of 3 weeks, the fund was able to attract close to $200 million in assets, remarkable considering how most other funds performed over the period. Clearly, WisdomTree has been able to gain quite a lot of interest and traction from investors for to its emerging markets fixed-income strategy. Whether that’s a result of superior marketing capabilities or a simple case of finding the right investor need and catering to it, is anyone’s guess. But most other Active ETF issuers could take a lesson or two from WisdomTree as another fund, the Dreyfus Brazilian Real Fund (BZF: 28.21 0.00%) was also able to increase its asset base $62 million to $220 million. WisdomTree’s largest fund remains the Chinese Yuan Fund (CYB: 24.84 0.00%), which stood at $585 million and in fact lost some money in August.

(Click table to enlarge)

In Canada, the Active ETF scene remained largely stagnant, with the exception of AlphaPro’s latest new launch – the Horizons AlphaPro Corporate Bond Fund (HAB) – which built on its successful launch by gathering $10 million more in assets. That brought the total assets within actively-managed ETFs in Canada to $340 million.

Head to our Active ETFs Database for a more dynamic listing of all Active ETFs.

New Entrants, Filings and Closures:

1. Huntington files for strategy using options – direct link

2. Claymore files to convert 2 passive ETFs into Active ETFs – direct link

3. U.S. One expands its exemptive relief and plans new Active ETF – direct link

4. Grail Advisors shuts down two of its funds – direct link

5. Van Eck removes derivatives from Active ETF plans – direct link

Disclosure: No positions in above-mentioned names.

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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. 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.

Grail Advisors Details Western Asset Ultra Short Duration ETF (GWLQ)

Shishir Nigam — Wed, 01 Sep 2010 11:00:16 +0000

On August 31^st, Grail Advisors filed a detailed prospectus with the SEC pertaining to a new actively-managed ETF called the Grail Western Asset Ultra Short Duration ETF, which will have the ticker GWLQ. Grail first filed for this product back in May and back then it planned to call the fund the “Grail Western Asset Enhanced Liquidity ETF”. The detailed prospectus now includes more information such as the expense structure for the fund and also provided disclosure on past performance of composites managed by Western Asset with similar strategies.

The investment mandate for the fund has not changed, and the Ultra Short Duration ETF will look to achieve maximum current income and preservation of capital by investing in short-term, investment grade fixed-income securities. Reflecting the short-term nature of the fund, the average duration of the portfolio is expected to be less than 1 year. The fund will be sub-advised by Western Asset Management Company, which is a California-based firm associated with Legg Mason Asset Management, that manages more than $478 billion in assets. Western Asset focuses its management expertise entirely on the fixed-income market. For the fund, Western Asset will employ an active, team-managed strategy and utilizes a top-down economic and interest rate outlook, combined with a bottom-up security selection process. The portfolio will be managed by a team of 4 managers who will be allowed to invest in debt issued by governments of Western Europe, Australia, Japan and Canada, aside from investing in US government and agency debt. However, all investments will be restricted to US$-denominated securities.

The Ultra Short Duration ETF will charge total expenses of 0.30%, which consist of 0.23% in management fee that goes to Western Asset. The total operating expenses are 0.42%, but an expense reduction has been put in place till August 31, 2011 to cap expenses at 0.30% for the first year of the fund. That fee structure will put in direct competition with PIMCO’s Enhanced Short Maturity Fund (MINT: 100.78 0.00%) that has seen a lot of success since launch. MINT has an expense ratio of 0.35%, so clearly the pricing for this new fund was decided upon with an eye upon the competition.

The prospectus also details the performance of a “Western Asset Enhanced Liquidity Composite” that represents performance for funds that are substantially similar to the planned Ultra Short Duration ETF. Since inception in Jan 1994, the composite has returned 4.18% compared to the benchmark’s 3.99%. This marks a marginal outperformance of 0.19%. The benchmark is a blended index consisting of a two-third weighting in the Citigroup 3 Month T-bill and one-third in the Barclays Capital U.S. Government Bond Index 1-3 Years. However, the composite underperformed this benchmark by about 40 basis points during the last 1 year and 3 year periods.

If this actively-managed ETF does end up gaining some traction, then it will become another money-market alternative that they can turn to for putting away their cash, aside from PIMCO’s MINT. Other firms like Eaton Vance have also filed to launch actively-managed ETFs which target the short duration segment of the bond market.

Disclosure: No positions in above-mentioned names.

In The Spotlight: PIMCO Short Term Municipal Bond Fund (SMMU)

Shishir Nigam — Tue, 31 Aug 2010 11:00:58 +0000

PIMCO’s Short Term Municipal Bond Fund (SMMU: 50.5109 0.00%) was launched in late January, 2010 and has since managed to accumulate approximately $18 million in assets, as of the end of July. SMMU is one of 3 actively-managed ETFs that PIMCO has brought to the market. The fund is managed by John Cummings, who is an Executive Vice President and also the head of the municipal bond desk at PIMCO. He also runs PIMCO’s Intermediate Municipal Bond Fund (MUNI: 52.28 0.00%) which focuses on longer maturity municipals.

The Short Term Municipal Bond Fund has gradually gained some traction with investors over the months, with its asset based increasing from just $8 million back in March, to about $13 million at the end of May, ramping up to the $18 million mark at the end of July. The fund should attract investors in higher tax brackets who are looking for tax-exempt sources of return. The municipal bond market though is by no means a sure bet, with many issuers and municipalities under severe budgetary pressures which can affect their ability to fulfill their obligations significantly. As such, SMMU provides investors who are looking for exposure to the municipal bond market, with access to PIMCO’s established management expertise in the fixed-income space. Unlike index funds which rely solely on rating agencies for credit analysis, the fund utilizes issuer-specific credit analysis from PIMCO. The fund charges investors an expense ratio of 0.35%, which is much lower than comparable mutual fund offerings.

Investment Mandate

The Short Term Municipal Bond Fund seeks attractive tax-exempt income while preserving capital by investing at least 80% of its assets into municipal bonds whose interest payments are exempt from federal income tax. The fund invests only in securities that are not subject to the federal alternative minimum tax (ie. AMT-free securities). The duration of the portfolio is expected to be less than 3 years and consist primarily of short duration, high quality bonds. The fund managers also do not utilize any derivatives to implement the investment strategies. The portfolio managers also look to manage capital gains and losses in order to minimize taxes on capital gains and harvesting losses.

Portfolio Composition

SMMU consisted of 69 individual securities as of August 28^th, whose average effective maturity was about 2.5 years. 71% of the fund was invested in securities with maturities between 1 and 3 years, with none of the securities exceeding 10 years in maturity. The fund’s composition does not differ much from its benchmark, the Barclays Capital 1-3 Year Municipal Bond Index. In terms of maturity buckets, where the index does not hold any securities exceeding 5 years in maturity, SMMU invested 5% of the funds in the 5-10 year maturity bucket. As a result, the average maturity of the fund is slightly higher that of the index.

Performance

Given that the fund has only been in existence for about 7 months, it would be unfair to judge the active manager’s performance on that time period. However, looking at the numbers can shed light on the fund’s track record so far. Since inception, SMMU has returned 1.40% till the end of July while the fund’s benchmark, the Barclays Capital 1-3 Year Municipal Bond Index, has returned 1.60% over the same period. That implies an underperformance of 0.20%. The returns of the fund after taxes would have been even lower, standing at 1.18%. The chart below compares the fund’s price performance to that of two comparable index ETFs – the iShares S&P Short-Term National AMT-Free Municipal Bond (SUB) and the SPDR Nuveen Barclays Capital Short-Term Municipal Bond (SHM):

The fund performed quite well in July, as the municipal bond market gained from an increase in investor’s risk appetite. With many states, such as California and New York, and municipalities failing to balance their budgets, credit selection remained important – as pointed out by PIMCO’s monthly commentaries. However, because supply and new issues in the municipal bond market have been limited, money is continuing to flow into this segment of the fixed-income market.

Premium/Discount History

Looking at the premium/discount history for Q2 2010, SMMU has a relatively clean record and has been able to keep the disparity between the ETF price and the fund’s NAV in a tight band. The fund was able to keep the premium/discount to within +/- 50bps on each of the 63 trading days in the quarter, though more time was spent by the fund trading at a discount than at a premium. That should give investors some confidence that they are not trading very far off the fund’s true value when investing or selling SMMU.

Disclosure: No positions in above-mentioned names.

Market Vectors Removes Derivatives From Two Active ETF Plans

Shishir Nigam — Mon, 30 Aug 2010 11:00:45 +0000

Van Eck Global, the company behind the Market Vectors line of ETFs, has been the latest issuer to modify its plans to remove the usage of derivatives in its proposed actively-managed ETFs. Van Eck currently manages in excess of $14 billion in assets in its exchange-traded funds and had previously filed with the SEC to launch two actively-managed ETFs: Market Vectors – Active Africa ETF and Market Vectors – Active Short Municipal ETF.

The original investment mandate for each of the two funds would have allowed them to invest in various derivative instruments such as futures contracts, equity linked derivatives, swaps and options. However, the latest amendment to the application, made on August 27^th removes this flexibility and the funds are no longer expected to utilize derivatives as part of their investment process. This move from Van Eck follows up on similar modifications made by other Active ETF issuers such as AdvisorShares and Legg Mason, who have tried to restrict the usage of derivatives in order to avoid delays and scrutiny associated with the SEC’s on-going investigation of derivative usage in ETFs. The SEC first announced this investigation in March 2010 and very few actively-managed ETFs have been launched on the market since.

Van Eck’s Active Africa ETF is planned to invest primarily in equity securities in Africa while seeking long-term capital appreciation. The fund advisors, Van Eck Advisors, will utilize qualitative and quantitative measures, to select companies for the Active Africa ETF that have growth potential within their market niche. The Active Short Municipal ETF will try to exceed the total return of the Barclays Capital AMT-Free Short Continuous Municipal Index by investing the large majority of its assets in investment-grade municipal securities, whose interest is tax-exempt from federal income tax.

Disclosure: No positions in above-mentioned names.

An Active ETF For A Real Estate Minefield?

Shishir Nigam — Wed, 25 Aug 2010 11:00:21 +0000

When expectations are missed by such a margin, everyone starts questioning their assumptions. On Aug 24^th, US existing home sales plunged by 27%. Where consensus expectations were for the number to be around 4.72 million, which in itself was a decrease from the previous number of 5.26 million, the actual home sales in July came out at 3.83 million, the lowest number in 15 years. The chart below, courtesy Zero Hedge, says it all:

This latest reading on the US housing market probably confirms in many people’s minds that the supposed recovery is not going to be as smooth and V-shaped many were hoping for in 2009. With the real estate sector being such a drag on the US economy, it’s hard to see this reflecting anything but poorly on the future prospects of the US real estate market. That’s where the “contrarian” investor in many people would say now would be a good time to make long bets on the US real estate market, after all, how much lower could it go? However, a naive line of thinking precisely like that could bring significant risks along with it. Any investors betting on the real estate sector now would have to pick their bets wisely, and avoid catching onto any falling knives.

Traditionally, investors have chosen to get exposure to the US real estate market through ETFs like the Vanguard REIT ETF (VNQ: 52.66 0.00%), the largest real estate ETF, which follows the MSCI REIT Index and cover about two-thirds of the entire US REIT market. Another popular alternative is the iShares Dow Jones U.S. Real Estate Index Fund (IYR: 53.23 0.00%), which follows the Dow Jones US Real Estate Index, and is the second largest real estate ETF in the US. And investors would generally have been satisfied with the performance of these ETFs so far, with VNQ returning a very solid 53.90% over the last 1 year till July 31^st and IYR returning 49.44% over the same period. However, it would be naive to expect similar performance going forward, especially after the weakness that has been confirmed by today’s data number.

A case can be made for the need for active management in the REITs sector, especially given the minefield that the US real estate sector is likely to represent going forward. Holding a passive can be useful to the extent of providing you with the broadest exposure possible, though as an investor, you would end up holding all the component securities in the index, whether bad or good. In contrast, an active manager would be able to apply some discretion with regards to which securities they choose to hold and would be able to take into account the fundamental quality of the securities.

An actively-managed ETF that provides investors with that possibility is the PowerShares Active U.S. Real Estate ETF (PSR: 43.76 0.00%). This fund is actively-managed by Invesco PowerShares and invests in securities selected from those included in the FTSE NAREIT Equity REITs Index (FNER). The lead portfolio manager, Joe V. Rodriguez, selects securities by using quantitative and statistical metrics to identify attractively priced securities and manage risk. PSR has total expenses of 0.80%, so investors will definitely be paying a premium over index ETFs, but PSR has shown the performance to justify the expenses. Since fund inception in Nov 2008, PSR has been able to return 53.3% as of June 30, 2010, compared to the FTSE NAREIT Equity REITs Index returning 33.1% while the S&P500 returned 11.8% in that period. A graphical comparison of the PSR fund to the Vanguard REIT Index (VNQ) and the iShares Dow Jones U.S. Real Estate Index Fund (IYR) highlights the outperformance:

Disclosure: No positions in above-mentioned names.

How Large Are Active ETF Premium/Discounts To NAV?

Shishir Nigam — Tue, 24 Aug 2010 11:00:01 +0000

A big difference between exchange-traded funds (ETFs) and mutual funds is the ability to trade in the ETF intraday on the exchange. Investors can see an indicative price for the fund at any point during the trading day and purchase or sell the fund just like they would a stock, using margin, limit orders etc. This is compared to mutual funds investors who can only sell or buy fund shares or units at 4pm on market close and that to at a price that they will not know until after the fact, once the net asset value, or NAV, is “struck”.

However, the advantage cited there is that mutual fund investors get the exact NAV of the fund as opposed to ETF investors making the transaction at an “indicative price” that could be at a premium or discount to the actual fund’s NAV. In general, ETF shares will trade at a premium to NAV when demand is high and at a discount to NAV when demand is low. There is a mechanism that exists which is intended to keep the ETF’s price close to NAV. The designated broker to the fund has the ability to arbitrage between ETF price and the fund NAV and creating a profit for themselves. They do this by creating or redeeming ETF shares from the fund company, in exchange for the underlying basket of securities that the broker can buy from or sell to the open market. However, the broker would only do this if the discrepancy between the ETF price and fund NAV is large enough to compensate them for the transaction charge they pay the fund company when creating or redeeming ETF shares. As a result, in every ETF, a small premium or discount to the fund NAV will always exist because the designated broker does not have enough incentive to arbitrage that away. But how small is small?

When looking at actively-managed ETFs specifically, there have been claims made that Active ETFs will tend to have larger premium/discounts to NAV because of greater turnover in the fund and lower interest from market makers and designated brokers etc. We decided to look at exactly how Active ETFs in the US have fared in terms of keeping their ETF prices close to NAV. The table below looks at the number of days in Q2 2010 (63 trading days) that each Active ETF spent trading premiums or discounts of different magnitudes. And the chart below that shows the average distribution across all 26 actively-managed ETFs that traded in Q2 2010. The information is compiled from data disclosed on each fund’s websites. The premium/discount is calculated as the % deviation of the ETF’s mid price on market close from the fund NAV.

From the table, we can see that most equity focused actively-manged ETFs have not had trouble keeping their ETF prices close to NAV, except maybe AdvisorShares Dent Tactical ETF (DENT: 19.5501 0.00%), that has spent more days trading at large premiums or discounts compared to other equity ETFs. On the fixed-income side, Grail’s two bond funds have had a tendency to trade at a discount of bewteen 50-99 bps quite a lot. This doesn’t compare well with PIMCO’s bond ETFs that have what you could call a “perfect score” in this context, as none of their funds traded at premiums or discounts greater than 50 bps in Q2. However, the largest discrepancies are seen from WisdomTree’s currency funds that trade outside of the 50 bps mark with surprising regularity. The most glaring offender would be the Brazilian Real Fund (BZF: 28.21 0.00%) which spent only 35 trading days trading within the tight 50 bps band, and had 8 days where it traded at a discount greater than 100 bps. Clearly, this is something WisdomTree should be looking at.

On average though, looking at Active ETFs as a whole, 87% of the time the funds traded within the +/- 50 bps range, with very few occurences overall where funds traded at large premiums or discounts in exccess of 2% or 200 bps. This is isn’t much different from most traditional index ETFs. As such, Active ETF investors don’t need to be overly concerned. It is more important to know in which asset classes you are more likely to encounter larger premiums and discounts than normal and keep a look out for those before investing.

Disclosure: No positions in above-mentioned names.

Grail Advisors, RiverPark Shutter Two Active ETFs

Shishir Nigam — Mon, 23 Aug 2010 10:53:29 +0000

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 20^th, Grail Advisors announced in a press release that they will be shutting down two of their actively-managed ETFs – the RP Technology ETF (RPQ: 26.59 0.00%) and the RP Financials ETF (RFF: 24.56 0.00%). 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 (RPX: 26.01 0.00%) and the RP Focused Large Cap Growth ETF (RWG: 26.855 0.00%). The two funds that are being closed had seen hardly any in flows since their launch, with both of them languishing around the $2.5 million mark, 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 (RPX) offering”. That might imply that RiverPark and Grail Advisors plan to push on with the RP Growth ETF for the while 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 (RWG) 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.