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.
 
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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:

 
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Links: Website, Factsheet, Prospectus

Investment Strategy:

AADR is an actively-managed ETF that looks to achieve long-term capital appreciation above international equity benchmarks. The fund will invest in non-US companies that trade on US exchanges through American Depositary Receipts (ADRs). The fund is sub-advised by WCM Investment Management which analyzes major trends in the global economy in order to identify those economic sectors and industries most likely to benefit. The managers look at a time horizon of 3-5 years and believe in portfolio concentration. The portfolio will typically consist of fewer than 30 companies, but will have a minimum of 20 holdings, none of which will exceed more than 25% of the portfolio in weight. AADR’s primary benchmark is the BNY Mellon Classic ADR Index and its secondary benchmark is the MSCI EAFE Index.

Portfolio Managers:

WCM Investment Management is California-based sub-advisor that was established in 1976 and managed $1.4 billion in assets as of Mar 31, 2010. The individuals handling the day-to-day management of the portfolio are as follows:

Paul R. Black, Portfolio Manager – Paul is the President & co-CEO of WCM and has been in the investment business for 26 years. He helps define the firm’s investment strategy and has an active role in the selection of securities.

Kurt R. Winrich, Portfolio Manager – Kurt is the Chairman & co-CEO of WCM and has over 25 years of experience in the investment business. His primary responsibilities include portfolio management and equity research.

Peter J. Hunkel, Portfolio Manager, Business Analyst – Peter joined WCM in 2007 and has been in the investment business for 11 years, with previous experience at Centurion Alliance and Templeton Private Client Group.

Michael B. Trigg, Portfolio Manager, Business Analyst – Michael has 9 years of experience in the investment business and previously worked at Morningstar.

The Numbers:

Expense Ratio – 1.25%, including 0.75% in management fees. Expenses capped below 1.25% till May 6, 2011.

What’s special about it?

1. AADR is the only Active ETF that focuses on providing exposure through ADRs. By virtue of its mandate, AADR will end up having exposure to international mega-caps that are listed in the US like Nestle and Baidu.com, two companies which can be found in the fund’s top 10 holdings.

2. Partnering with BNY Mellon does give the fund a big advantage because BNY Mellon is the world’s largest depository for ADRs and is a leading source for international ADR market intelligence.

3. The fund’s sector and region diversification differs significantly from that composition of its benchmark indices – the BNY Mellon Classic ADR Index and the MSCI EAFE Index, but that’s where the managers hope to add value to the fund.

Analysis:

Positives –

- The managers, WCM Investment Management, have quite a strong track record in managing international portfolios. The prospectus highlights the performance of a “Focused Growth International Composite” that has similar objectives and investment strategies to the fund. The composite outperformed the MSCI EAFE by close to 9%, since inception in Dec, 2004.

Negatives –

- AADR’s expense ratio of 1.25% comes in at the high end of the Active ETF market, and it is only capped at 1.25% till May, 2011. The gross expenses for the fund are actually 1.29%.

- The portfolio concentration could lead to more volatile returns, implying greater upside during good times but also greater downside during bad times.

 
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Links: Website, Factsheet, Prospectus

Investment Strategy:

GRV is an actively-managed ETF that has an investment objective to exceed the total returns of the MSCI World Index with little or no correlation with the index. The fund does this by establishing long/short positions in other ETFs that provide exposure to certain groups of equities. The fund takes long positions in what they believe are the most attractive opportunities and then establishes an equivalent dollar amount of short positions in unattractive regions. By having a net market exposure of zero in the core of the portfolio, the fund’s sub-advisors – Mars Hill Partners – minimize market exposure and directional influences. However, the portfolio managers can use derivatives to add directional exposure of up to 50% net long or short on top of the core market neutral portfolio. This does mean that the fund may be leveraged in instances where it has a net long or short exposure, which is obtained through futures or swaps.

Mars Hill utilizes numerous multi-factor regression models to identify the highest and lowest probability opportunities and risks, with the primary driver being a dynamic ranking of four major regions – US, Europe, Asia and Emerging Markets.

Portfolio Managers:

Mars Hill Partners LLC is a Colorado-based investment advisor that is an affiliate of Huntley Thatcher Ellsworth Ltd (HTE) and was created in 2009 by principals from HTE. The day-to-day management of GRV will be done by the following portfolio managers:

James D. Huntley – James is the founding member of Mars Hill as well as HTE which he founded in 1997. Prior to that James worked spent 5 years advising affluent families and institutional clients for boutique firms.

David A. Houle – David is the Director of Research at Mars Hill and HTE and oversees strategy development, trading and risk management. He joined HTE in 2002.

Elliott J. Orsillo – Elliot joined Mars Hill in 2010 and HTE in 2009 after working with Russell Investments for 6 years as a portfolio manager.

Gregory L. Thatcher – Gregory joined Mars Hill in 2010 and HTE in 2000 after working for 15 years in the brokerage industry.

The Numbers:

Expense Ratio – 1.49%, including 1.35% in management fees. Expenses capped below 1.50% till Mar 14, 2011.

What’s special about it?

1. GRV is the first actively-managed ETF on the market that provides long/short exposure, giving the managers an opportunity to extract alpha not just from their long bets but also their short bets.

2. GRV has been able to attract investors very quickly. In the 1 month since the fund was launched, GRV has already gathered close to $39 million in assets, quickly making it the largest equity-focused active ETF in the US.

Analysis:

Positives –

- Having a core market neutral strategy allows the managers to avoid having a strong market exposure that long funds are exposed to. At the same time, the optional directional overlay gives the manager the ability to take advantage of a strongly trending market.

Negatives –

- GRV’s 1.49% expense ratio makes it the second most expensive Active ETF in the US, coming in after the Dent Tactical ETF (DENT), also run by AdvisorShares. The high expense ratio will be justifiable only if the managers are able to outperform their benchmark by a large enough margin.

- The advisor was only established in 2009, so there’s not much of a track record from funds that Mars Hill may have run previously, which investors can look to for reference.

Disclosure: No positions in above-mentioned names.

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MUNI has gained traction and assets slowly and steadily since March, 2010 when it had $23 million in assets to about $43 million now. The strategy should appeal to investors in higher tax brackets that can take advantage of the tax-exempt income available from municipal bonds. The main value proposition for the actively-managed ETF is ability to avoid owning bonds of issuers that managers feel have poor credit characteristics, especially in an environment where many US municipalities are stretched financially. The ETF has not been as quick to grow as PIMCO’s money-market offering, the Enhanced Short Maturity Fund (MINT: 100.78 0.00%) and many industry watchers are looking to MUNI for confirmation that PIMCO’s success was not one-off with MINT.

Investment Mandate

MUNI invests at least 80% of its assets (under normal conditions) in intermediate duration, high quality municipal bonds which provide interest income that is free from federal and sometimes state tax. Research is done on the credit quality of the issuing municipalities with an effort to avoid weak issuers, while maintaining the average duration of the portfolio between 3-8 years. Importantly, the portfolio invests only in AMT-free bonds and avoids futures, options or swaps. The ETF has net annual expenses of 0.35% and is benchmarked against the Barclays Capital 1-15 Year Municipal Bond Index.

Portfolio Composition

The portfolio composition of MUNI differs quite a bit from its benchmark which, of course, is how the managers try to outperform their index. The big differences lie in the fund’s maturity distribution, which is presumably where the managers are looking get their outperformance from. Where the Barclays Capital 1-15 Municipal Bond Index is quite evenly spread out across maturities between 1-20 years, MUNI currently concentrates 77% of its holdings within the 5-10 year maturity range and hence has much lower proportions in other maturity buckets. The 5-10 year maturity bucket for municipal bonds likely provides better liquidity in securities that the managers can take advantage of. Despite the higher concentration in a lower maturity bucket, MUNI’s overall average maturity is shorter than that for the index because the fund has a much lower concentration in the 10-20 year bucket versus the index.

Performance

Looking at the performance of the fund relative to its index though, MUNI has not performed all that well. In every time period, except the last 1-mth, the fund performance has lagged behind the benchmark. For example, since inception, the fund has underperformed the index by 42 bps, with NAV returns of the fund being 2.18% while the index returned 2.60%.

To provide a visual comparison, the performance of MUNI is compared to the iShares S&P National Municipal Bond Index Fund (MUB) below:

To understand why MUNI may be underperforming, it’s helpful to read the monthly manager commentaries that describe market conditions. The municipal bond market did see overall strong performance in the month of May alongside a flight to quality resulting from the debt crisis in Europe. Another factor has been continued concerns over budget deficits across states and municipalities in the US that have been aggravated due to April tax receipts being lower than expected.

Premium/Discount History

As with any ETF, it’s important to look at how closely the ETF’s share price has been tracking the fund NAV because large deviations from NAV may mean investors may be getting a raw deal when they get in and out of the fund. In that regards, MUNI has done a good job of keeping deviations to a minimum, with no instances in Q1, 2010 where the ETF price deviated from the fund NAV by more than 50 bps.
 
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The Active AlphaQ Fund saw a strong increase in assets in the month of Feb 2010, with AUM increasing by more than 400% as PQY saw inflows of $14 million. Since then the fund had continued to gather assets peaking at more than $25 million at the end of Apr, before dropping back down to about $21 million.

Investment Mandate

As mentioned in the In Focus article on PQY, the Active AlphaQ Fund has an objective of long-term capital appreciation with the goal of outperforming the Nasdaq 100 Index. The fund sub-advisors, AER Advisors, invest the portfolio largely in 50 Nasdaq-listed securities that are selected based on a ranking system developed by AER called the “NOW” ranking system, based on earnings growth, valuations and money flows. The portfolio is managed on a day-to-day basis by David O’Leary who is the CIO of AER Advisors. A unique aspect of the fund is that PQY focuses on holding each of the 50 securities on an equal weight of 2% and rebalances whenever the weight exceeds 3%. PQY has an expense ratio of 0.75% which is reasonable for actively-managed equity ETFs.

Performance Evaluation

Given that the managers operate the fund largely using a quantitative model, it’s hard to discern the investment reasoning behind the fund’s holdings or strategies. In general though, PQY has more than 90% of the fund invested in mid-cap growth and large-cap growth equities, and 44% of the fund is invested in companies within the information technology sector.

Looking at the chart of the fund’s performance since inception, the results have been mixed. While PQY has underperformed its official benchmark by about 7-8%, it has outperformed the S&P500 by more than 10% during that period. However, that outperformance is more attributable to the fact that the Nasdaq 100 Index itself outperformed the S&P500 by a wide margin, rather than due to manager skill. Looking at a more recent period though, the performance is favourable for PQY.

If we look at returns in the last 6-months, the managers have really pulled up their socks. Especially during the market ramp-up from Feb-April end, PQY was able to outperform both the Nasdaq 100 and the S&P 500 quite handily. However, that outperformance has been reduced since, due to the tough month in May. That improvement in performance might well have been the impetus that lead to new flows into the fund starting in Feb.

If the managers can keep up the recent performance, then PQY could definitely attract more assets once the markets come out of their recent short-term slump.

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Money-Market Alternative?

If you look at the make up of MINT in its IN FOCUS coverage, you’ll see it is essentially a money-market alternative for investors who are looking to stash away their excess cash and who do not want to subject their money to the miniscule return offered by treasuries and money-market funds. With an effective holdings maturity of just 0.84 years, the liquidity in the portfolio is likely very high. And this notion of being a money-market alternative is supported by how the assets managed have varied with respect to the market performance. Looking at the table below, you can see the trends in AUM versus the market performance since March.

In the month of March and April, when the S&P500 was on a rampage, the assets managed by MINT peaked out at the end of March and actually decreased in the month of April, as the market itself peaked out. This is generally in line with contrarian expectations which would point towards the lowest cash allocations in portfolios just when the market is peaking, as everyone tries to chase the bull. And then came May, when the S&P500 fell by more than 8% and investors fled to the safety of the US$ and non-risky assets. That set the stage for MINT’s explosive growth as investors looked for places to park their cash, while not willing to settle for traditional money-market returns. In that sort of a scenario, any vehicle that purports to seek greater returns than money-market funds while still providing ample liquidity, will seem quite attractive – and that’s exactly what MINT does.

Just Hope or Real Outperformance?

Given what the Enhanced Short Maturity ETF promises, the next question naturally is, has it delivered? Is all this money flowing into the fund just in hope of better performance than what any money-market fund could give them or are they seeing some real outperformance?

The MINT portfolio is managed by Jerome Schneider, an EVP at PIMCO’s Newport Beach office who joined PIMCO in 2008. As of writing, the fund had 473 holdings and invested only in investment grade securities while staying away from derivatives usage. A large portion of those holdings are invested in investment grade credit as well as government securities. The fund is benchmarked against the Citigroup 3-month Treasury Bill Index. From performance numbers on the fund’s website, MINT has outperformed the index by 38 bps year-to-date. If you were invested in the index, you would have earned a measly 2 bps while an investment in MINT would have returned you 41 bps. To put this visually, I charted the MINT price performance against a comparable index – the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL), and the outperformance is quite clear. So, the investors putting their faith in MINT are not being taken for a ride.

Will Assets Track Market Sentiment?

Granted that PIMCO is doing a good job of delivering on its investment objective, but given how the assets under MINT have fluctuated inversely with the market, it begs the question – is MINT’s attractiveness to investors destined to be linked with market sentiment? In other words, will assets managed by MINT drop back to previous levels once we see the next upward bounce in the market and investors dive right back into making riskier bets?

The answer to that question will not be obvious until we’ve gone through a few such cycles. There is little doubt that in large part, the investor interest in MINT will depend a lot on their interest in holding cash. The outperformance will no doubt impress investors while they are in it, but when markets get on a role again, there are very few investors that will settle for a 41 bps return. By virtue of the asset class that MINT operates in, it will be hard for it to maintain its appeal to investors continuously. But then again, no asset class or investment category holds the top seat through every market cycle, and PIMCO’s MINT shouldn’t pin its hopes on doing so either.
 
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Clearly, the Dent Tactical ETF has not been able to recover from its underperformance of the past year. In fact, the performance seems to have deteriorated further. As of May 6, 2010, DENT was down 4.49% since inception, while the S&P 500 was up more than 5.55%, representing an underperformance in excess of 10%. So what’s behind this poor showing?

As detailed in the In Focus article on DENT, the fund is managed by portfolio managers Harry S. Dent and Rodney Johnson. Harry Dent, a well-respected name in finance, is famous for creating “The Dent Method”, a forecasting approach that is based on demographic trends. The fund’s strategy tries to identify “through proprietary economic and demographic analysis, the overall trend of the U.S. and global economies and how consumer spending patterns may change”. The managers then utilize ETFs to translate their views into portfolio allocations. Taking a cursory look at DENT’s existing holdings on its website, the fund’s biggest allocation is to XLY – the SPDR Consumer Discretionary Sector ETF. However, the entire portfolio is essentially equally spread out between 10 different ETFs, with the smallest weight being 9.01% and the largest being 10.39% of the fund, as of May 5, 2010. All of the fund’s current top 5 holdings have handily outperformed the S&P500 in the last 6 months. Of course, DENT may not have necessarily been holding these ETFs in their current weightings in the past. So why was there underperformance despite allocation to seemingly strong segments of the market?

Digging into the monthly manager commentaries put out by Harry Dent provides some clues. The DENT portfolio was sitting 30% in cash in February and at the end of March, the managers were again “waiting on the sidelines with our cash position to see who wins, buyers or sellers”. The heavy allocation to cash has been justified by the managers to be largely a result of what their proprietary model tells them and also due to their momentum strategies which creates “transition periods” during which the fund sells one ETF and sits on cash while waiting for a buy signal from another ETF. While hard to say how persistent these cash allocations were, they could well be a contributing factor to this lagging performance. With the equity markets roaring up in 2010, with the exception of the last few weeks, sitting on un-invested cash would definitely detract from returns. In this interview with Noah Hamman on IndexUniverse, Cinthia Murphy also probes Noah on DENT’s high turnover levels. That could be another important factor hampering returns.

Whatever the case, DENT will have to make some major leaps in its performance if it is to justify its relatively exorbitant expense ratio to investors going forward or else the trickle of assets flowing into DENT over the last few months might stop all together.

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Links: Website, Factsheet, Prospectus

Investment Strategy:

ONEF is an actively-managed ETF that is a fund of funds looking to achieve long-term capital appreciation by investing at least 80% of its assets in the shares of other ETFs. The fund aims to be a simple and easy way to own a global diversified, professionally managed portfolio in a single fund. The underlying ETFs that the fund invests in can be holding companies of any size in both developed and emerging markets. There is restriction on how much of the portfolio may be invested in foreign companies. The advisor of the fund, US One Inc, will utilize an asset allocation strategy that pre-determines a target mix of investment types for the fund and then implements the strategy by selecting ETFs that best represent each of the desired investment types. ONEF may also invest in ETFs holding fixed-income securities, but will invest primarily in those that hold equities. The ETF will have total expenses of 0.51%, including a 0.35% management fee and 0.16% in acquired fund fees that would result from purchasing the underlying ETFs. The portfolio will be benchmarked to the S&P500 and will generally buy and hold securities, with minimal portfolio turnover which is not expected to exceed 10% of the portfolio’s value.

For all intentional purposes, the prospectus outlines the 3 ETFs that ONEF will likely have large positions in: Vanguard Large Cap ETF, Vanguard Small Cap ETF and Vanguard Europe Pacific ETF. The fund will be invested in 3 or more ETFs at all times.

Portfolio Managers:

U.S. One Inc., based out of Nevada, will be responsible for the management of the fund. U.S. One is a registered investment advisory firm which focuses on low-cost and simple investing, following buy-and-hold principles. Specifically, the portfolio manager the fund will be:

Paul Hrabal – Paul is the President of U.S. One Inc. and founded the investment advisor in 2008. Prior to founding the Adviser, Mr. Hrabal was, from 2002 to 2009, President of U.S. Data Trust Corporation, a provider of data backup and disaster recovery services for small to mid-sized businesses. Previously, Mr. Hrabal founded an internet company, GoVote.com, Inc. in July 1999, which he sold in March 2000, and was Director of Finance and Business Development with Dell Computer from August 1992 to July 1999

The Numbers:

Expense Ratio – 0.51%, including 0.35% in management fees and 0.16% in acquired fund fees

What’s special about it?

1. Interestingly, the 3 specified underlying ETFs together have expenses that amount to 0.41% for retail investors buying them off the shelf but despite this ONEF’s total acquired fund fees only amounts to 0.16%.

2. The fund can also only invest in ETFs traded in the US, even though the ETFs themselves they may hold securities that are traded in foreign markets.

Analysis:

Positives –

- ONEF’s low turnover and infrequent rebalancing helps ensure that costs are kept to a minimum. At 0.51%, the fund’s expenses are much lower than the only other Active ETF of ETFs out there, the Dent Tactical ETF. ONEF is no doubt helped by choosing some of the cheapest and most diversified Vanguard ETFs to invest in.

- The strategy employed by the fund is very simple and there are hardly any complexities for investors to figure out, other than maybe how the allocations to each fund are decided upon. This makes for an attractive product, especially for investors who prefer simplicity in their investments.

Negatives –

- ONEF pursues a largely buy-and-hold strategy, which has worked in certain time frames and probably also over the very long run. But in the short to medium term, the ups and downs and volatility of the market could make the strategy ineffective, as many investors saw at the end of 2008, when long-standing belief in buy-and-hold was shattered.

- US One has been a registered advisory firm only since 2008. The firm’s relative anonymity will likely pose some challenges in attracting investor interest and assets.

Disclosure: No positions in above-mentioned names.

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The launch of One Fund highlights the inherent flexibility of an actively-managed ETF structure. Today, Active ETFs house everything from municipal bond portfolios to long-short relative value strategies, plain vanilla equity growth funds to seasonal rotational strategies, money-market instruments and even absolute return funds. And with the launch of ONEF, there are now two actively-managed ETF of ETFs on the market. And waiting in the wings to launch are even more varied strategies such as international equity funds, ADR-focused funds and global macro strategies. The kind of diversity the Active ETF structure allows, combined with the benefits of ETFs in general – tax efficiency, liquidity, transparency, low cost – makes for a compelling argument for issuers and fund managers to consider.

This latest addition to the Active ETF line up, One Fund (ONEF), will have an investment objective of achieving long-term growth but its investment strategy will rely entirely on low cost Index ETFs that it will invest in. The fund aims to provide pure asset class exposure to an internationally diversified equity portfolio representing in excess of 5,000 companies worldwide in different sectors. Paul Hrabal, the Chief Investment Officer of the fund elaborated, “We have taken a top level view of how a global stock portfolio should be allocated by region and company size, then selected index-based ETFs that represent each of those segments at the lowest cost. The Fund will then hold that allocation long term. There is no intent to make short term, tactical changes to the allocation based on any view of how one country/region/industry/size company will perform vs. another.” ONEF is hoping to take advantage of low cost index ETFs that track individual markets and provide the desired exposure cheaply. As a result, the fund’s expense ratio is a relatively low 0.51%, in comparison to other funds providing exposure to multiple ETFs or structured as a fund-of-funds. The strategy emerges from Paul Hrabal’s belief that high cost actively-managed mutual funds are not providing much value to investors and that “long-term, buy and hold, passive index-based investing” is the way to go.

Paul Hrabal is the President of U.S. One Inc. and also the Chief Investment Officer for the ETF. He has 20 years of experience in the financial management and business development and will be the person responsible for making day-to-day investment decisions for ONEF.

Paul also mentioned that ONEF will undergo rebalancing only once a year and will have tolerance bands set for each segment of the fund’s allocation, which if breached, would trigger rebalancing. “We believe annual rebalancing with a 5% band is the best approach to 1) ensure adherence to our allocation targets while 2) keeping transaction costs and, hence, the overall fund costs, to a minimum”, Paul said. The fund is expected to have a turnover of less than 10%.

All the details on ONEF, the fund fact sheet and its prospectus can be found here.

Disclosure: No positions in above-mentioned names.

If you haven’t already subscribed to ActiveETFs | InFocus, do it here via Email or via RSS feed!
 
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. None of the material above and elsewhere on EtfsHub is intended to endorse or promote any company or its products. 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.