Grail Plans Active Money-Market-Type ETF

Cinthia Murphy
May 17, 2010

Grail Advisors, one of the pioneers of actively managed exchange-traded funds, filed with the Securities and Exchange Commission to launch an active ETF focused on short-term fixed-income securities that will face off with a competing money market proxy fund offered by Pimco.

The San Francisco-based company said the Grail Western Asset Enhanced Liquidity ETF will cost investors 0.30 percent a year. It didn’t include a trading symbol for the fund, but it did say it will be listed on the New York Stock Exchange when it launches in August. Grail partnered with Western Asset Management Company, a fixed-income asset manager.

The plan for the new ETF comes at a time when volatility has returned to financial markets and investors are looking for safe places to park assets they don’t want to invest in riskier assets such as stocks. The ETF will not invest in any derivatives instruments, staying clear of the ongoing SEC review on the use of those instruments in mutual funds and ETFs alike.

“Investors are not only looking for returns better than money market funds, but they are looking for transparency,” Grail Advisors’ Chief Executive Officer Bill Thomas told IndexUniverse. “This product is perfect because it’s well positioned to do just that at a time when interest rates are at all-time lows.”

The ETF will typically invest in investment-grade, money market and short-term debt securities. That will include obligations issued by the U.S. Treasury and agencies, corporations and banks. Possible types of debt include asset-backed and mortgage-backed instruments, commercial paper and other highly rated, short-maturity securities.

The average duration of the portfolio is expected to be one year or less, the filing said.

“This fund will invest in short-term bonds focused on maximum current income with preservation of capital,” Thomas said. “Investors continue to move from equities into fixed income. We want to keep building on our fixed-income funds.”

Competing With Pimco

The Grail Western Asset Enhanced Liquidity ETF will go head-to-head with Pimco’s Enhanced Short Maturity Strategy ETF (NYSEArca: MINT), which has already gathered some $178.5 million in assets since its November 2009 inception.  The Newport Beach, Calif.-based company’s “MINT” fund is slightly costlier, at 0.35 percent in annual fees.

While Grail’s ETF can only invest in dollar-denominated debt, those could include obligations issued or guaranteed by governments in Western Europe, Australia, Japan and

Pasadena, Calif.-based Western Asset Management, which is affiliated with Legg Mason, Inc., has about $478 billion of assets under management. Western will serve as subadviser for the fund.

“Having this caliber of a subadviser is a huge win for us,” Thomas said. “The marketplace is very receptive to actively managed strategies, so we want to keep building on these partnerships.”

In January, Grail Advisors launched two other fixed-income funds in partnership with McDonnell—the Grail McDonnell Intermediate Municipal Bond ETF (NYSEArca: GMMB) and the Grail McDonnell Core Taxable Bond ETF (NYSEArca: GMTB).

Thomas said Grail already has other partnerships in the works as it looks to expand its lineup of customized, actively managed ETFs.


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