GRV: Actively-Managed Absolute Return Long/Short ETF of ETFs With Broker Incentives

AdvisorShares Mars Hill Global Relative Value ETF (GRV) began trading last Friday (7/09/2010).  The new ETF has a primary objective of generating consistent positive returns in excess of the average annual return of the MSCI World Index – GRV is an absolute return fund.

The fund’s sub-advisor, Mars Hill Partners, LLC, employs a “Relative Value” approach across major global regions to establish “long” positions that they expect will outperform the MSCI World Index and will equal 100% of portfolio assets.  They also place another 100% of assets into “short” positions they expect will underperform the index – GRV is a market neutral long/short fund.  GRV will not track any index, and its managers will be free to make portfolio changes on a daily basis – GRV is an actively managed ETF.

The fund seeks to achieve its investment objective by primarily investing in both long and short positions in other ETFs and ETNs – GRV is a “fund-of-funds”.   Additionally, GRV may use liquid futures contracts, swaps and other derivatives tied to broad market indices to establish up to 50% net long or 50% net short exposure on top of the core long/short portfolio – GRV may use a directional overlay.

If you purchase fund shares through a broker-dealer or other financial intermediary, they may be paid for their efforts by the fund (GRV), the primary advisor (AdvisorShares), or the sub-advisor (Mars Hill).  These payments may create a conflict of interest by influencing broker-dealers or other intermediaries and your salesperson to recommend GRV over another investment.  These are not 12b-1 fees, which are covered in the next paragraph.  These are similar to sales loads and trailing commissions in the mutual fund marketplace – GRV has broker sales incentives.

GRV has adopted a 12b-1 distribution plan that allows GRV to pay distribution fees at an annual rate not to exceed 0.25% of average daily net assets.  These fees would be extracted from your investment in the fund.  The fund has agreed that no such fees will be charged prior to March 14, 2011.  However, in the event that 12b-1 fees are charged in the future, because GRV pays these fees out of assets on an ongoing basis, over time these fees may cost you more than other types of sales charges and will increase the cost of your investment – GRV may add 12b-1 fees in nine months.

By now you must be wondering how the fund can afford all these costs.  The answer is likely to be found in the fund’s expense ratio.  For the first nine months, AdvisorShares agrees to not let the net expense ratio exceed 1.50% and has “generously” set the initial limit at 1.49%.  The management fee is fixed at 1.35% of assets, of which 0.9% to 1.0% will be paid to Mars Hill as the sub-advisor.  Whether the fund, the advisor, or the sub-advisor pays the broker sales incentives, in reality it is the shareholders that will be footing the bill by way of the 1.35% management fee.  After nine months (March 14, 2011), the fee cap comes off and 12b-1 fees can be added.

The GRV overview page provides background information and links to other data sources.  The GRV fact sheet (pdf) contains similar data in a more printer-friendly format.  As of Friday’s market close, the fund had long positions totaling 100.4% of the assets with the largest positions being Vanguard REIT ETF (VNQ) 10.2%, JPMorgan Alerian MLP Index ETN (AMJ) 10.0%, iShares MSCI Japan (EWJ) 9.9%, iShares MSCI Germany (EWG) 7.5%, and iShares MSCI South Korea (EWY) 5.1%.

Short holdings were equal to 100.6% of the portfolio with the largest positions being iShares MSCI EAFE Index (EFA) -20.6%, iShares MSCI France (EWQ) -20.1%, iShares MSCI Australia (EWA) -10.1%, SPDR Health Care Select Sector (XLV) -7.6%, and SPDR Technology Select Sector (XLK) -5.0%.  A directional overlay of September S&P E-mini futures was pegged at less than 1% of the portfolio.

There is a two-page description of the GRV investment process (pdf) highlighting the relative value strategy employed by the fund.  The fund’s goal is to deliver “pure alpha” by having zero market risk (beta = 0).

The first day of trading for GRV showed exceptionally strong volume for a new ETF with 1,566,700 shares, or about $39 million, changing hands.  However, the fund’s assets stood at just $13.8 million at the end of the day, so perhaps much of the activity was related to brokers trying to generate incentives.

Additional information about the fees and other aspects of the fund are in the prospectus (pdf).

Disclosure covering writer, editor, and publisher:  Long VNQ and AMJ.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.