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Grail Makes Big Bet on Actively Managed ETFs


The actively managed exchange-traded funds sector is increasingly going mainstream, and Grail Advisors is riding right along with it. Grail is aggressively expanding its product lineup, introducing two fixed-income funds that brings to seven its stable of actively managed exchange-traded funds.

William Thomas, the chief executive officer of the San Francisco money manager, said in an interview that the company plans to introduce still more equity and fixed-income actively managed ETFs and is in talks with mutual fund companies that are interested in converting to the products.

"We expect to significantly ramp up assets now that we have been in [the] market for almost a year," he said. "We should be between $500 million and $800 million [of assets under management] by the end of the year."

Grail has introduced the Grail McDonnell Intermediate Municipal Bond ETF and the Grail McDonnell Core Taxable Bond ETF. Both portfolios are actively managed and subadvised by McDonnell Investment Management LLC, a Chicago fixed-income specialist that manages more than $13 billion of assets.

Thomas said the funds are important for Grail's lineup because they "provide a kind of transparent, liquid and low-cost exposure to the bond market that should enable investors and financial advisers to implement strategies more effectively than they could with traditional fixed-income mutual funds."

Grail started its first actively managed ETFs in May. Thomas conceded that Grail is "very much in its infancy" but said he is confident it can develop assets. "The sector is by far the growth engine for ETFs in the next several years."

Analysts said companies including Manulife's John Hancock, Goldman Sachs and T. Rowe Price have filed applications with the SEC to begin introducing actively managed ETFs.

Three companies dominate the ETF market: BlackRock Inc., State Street Corp. and Vanguard Group. In December, BlackRock completed its $13.5 billion purchase of Barclays Global Investors - a longtime leading ETF provider with its iShares products - and became the largest provider of ETFs. BlackRock's ETF business grew 44.5% last year, to $114.7 billion, and it has been introducing new portfolios this year.

Last year, nine companies began offering ETFs as the number of funds grew by 10%. Three of those nine, including Grail, introduced actively managed ETFs.

Thomas said the ETF universe is overwhelmed by a few large players because ETFs began as index-based products. With more actively managed products being introduced, competition will increase.

Grail plans to introduce sector-based funds, country-specific funds and hedge-like products this year. In addition to McDonnell, Grail uses the money managers American Beacon Funds, New York-based RiverPark Advisors and St. Louis-based Wedgewood Partners to sub-advise its actively managed equity ETFs.

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