The Holy Grail, Active ETF’s

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June 19, 2009 9:06am ETF BASIC NEWS

active1Lawrence Carrel wrote an article this morning for “The Big Money” detailing the ongoing evolution in the ETF industry that further clouds what was once the definition of an ETF. His article is titled “When Is An Index Fund Not An Index Fund.” The ETF industry is evolving and creating more and more creative products stretching the indexing definition.


Lawrence concentrates his efforts on the push towards actively managed ETF’s. He states that “the industry had been waiting for the right moment to revive what many consider the industry’s Holy Grail. Coincidentally, a new entrant in the field named Grail Advisors launched the first post-financial-crisis active ETF last month.”

“We are operating the ETF just like a fundamental mutual fund,” said Grail Chief Executive Officer Bill Thomas in an interview. This ETF, he added, is “similar to traditional actively managed mutual funds … because it allows portfolio managers unrestricted trading.”

Is this a good thing for the ETF industry? Possibly. Is it a good thing for investors? Definitely not.

Lawrence points out that, “Most ETFs offer greater tax efficiency because, unlike mutual funds, they don’t buy or sell the shares they own. Every time a mutual fund sells shares, it creates a taxable event, which its shareholders must pay taxes on. However, ETFs receive their securities in a tax-free swap. An institutional investor known as an authorized participant gives a basket of all the securities in the index to the ETF in exchange for ETF shares. With no shares traded inside the fund, there are no taxable gains to pass onto shareholders.

By contrast, the whole point of an active fund is to actively trade stocks. In this case, the ETF could incur significant capital gains, which shareholders would pay taxes on. Grail’s Thomas countered that the sub-advisers running its fund don’t trade a lot and have a reputation for tax efficiency.”

For the whole story click: HERE


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