Dissecting the First Actively Managed ETF

Grail Advisors, based in San Francisco, will forever be known as the company that sold the first actively managed exchange-traded fund, the Grail American Beacon Large Cap Value ETF(GVT Quote). Its advantages over a mutual fund are clear: The ETF is more flexible, transparent and cheaper.

The ETF uses Brandywine Global Investment Management, Hotchkis and Wiley Capital Management and Metropolitan West Capital Management as sub-advisers. All three are established, successful and well-regarded.

Each firm has been allocated a third of the fund to manage, and there are no rebalancing plans if one manager outperforms or trails the other two. The sub-advisers are free to buy and sell securities as they see fit.

The fund will buy large companies, with a bias toward value instead of growth, though many growth names, because of the severity of the bear market, now resemble value stocks. Grail American Beacon Large Cap Value ETF has a 15.5% weighting in tech, with larger holdings being IBM(IBM Quote), at 2.6%, and Oracle(ORCL Quote), at 2.1%.

Technology can show up in a value fund because the criteria are vague. They include above-average growth potential in earnings, below-average price-to-earnings ratio, below-average price-to-book ratio and above-average dividend yields. Those criteria come from the prospectus, but there's no mention of defining how to compare P/E ratios, dividends or the like. Should it be against the stock's own history, or other stocks currently, or something else? Actually, vagueness is a plus. If you want to use active management, it doesn't make sense to saddle the people you've hired with a long list of restrictions.