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 (NYSE: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 (NYSE:MINT) 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.

Written By Shishir Nigam from ActiveETFs | InFocus

Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.

Disclosure: No positions in above-mentioned names.
 
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