Grail McDonnell’s New ETF Not Aiming to Mimic Benchmark Index

Why try to match the market when you can beat it?

That is the principle underlying the latest municipal bond exchange-traded fund to hit the market — the Grail McDonnell Intermediate Municipal Bond ETF.

Launching Friday with the ticker symbol “GMMB,” the fund will pay monthly dividends and trade on the NYSE Arca.

Unlike most of the other 26 muni ETFs, though, this one will operate without trying to mimic a benchmark index.

All but one of the municipal bond ETFs that have launched since the birth of the industry in 2007 operate with the goal of replicating an index.

The idea is to offer investors exposure to an asset class, such as high-yield municipal bonds or weekly variable-rate debt obligations.

For instance, the biggest muni ETF — iShares’ $1.64 billion S&P National AMT-Free Municipal Bond Fund — has one goal: to achieve the same returns as the S&P National AMT-Free Municipal Bond Index.

PIMCO in December became the first company to launch a muni ETF without a mission to mirror a particular index — the PIMCO Intermediate Municipal Bond Strategy Fund.

While the fund does publish a benchmark index, PIMCO acknowledges it is better to beat the benchmark than to tie it. The term for this is “actively managed.”

The Grail Advisors LLC fund, which is sub-advised by McDonnell Investment Management LLC, is the second actively managed municipal ETF.

The fund’s benchmark index is the Barclays 3 to 15 Year National Municipal Bond Index, but like the PIMCO fund the goal is not to track the index but to top it.

Michael Kamradt, McDonnell’s chief investment officer, said passively managed ETFs can force a manager to make unwise investments in weak-credit bonds just because they are included in the target index.

Investors can expect this ETF to offer the same type of style as McDonnell’s separately managed municipal accounts, Kamradt said.

The fund leaves itself with a lot of flexibility for how it will be managed. It can invest in bonds of any maturity and any credit quality, though it expects the average maturity to be between three and 10 years with mostly high-grade paper.

In a white paper last August, McDonnell argued that actively managed ETFs are the wave of the future.

Passively managed ETFs took a hit in 2008 when many of their asset values became unmoored from the indexes they were meant to track.

Nonexistent in mid-2007, municipal bond ETFs have burgeoned to more than $6 billion in assets as of the end of 2009, according to the Investment Company Institute.

For reprint and licensing requests for this article, click here.
Buy side
MORE FROM BOND BUYER