How do you launch a new product in a field with 1,400 competing products? That’s the question Wesley Gray pondered this year as his Philadelphia area-based money management firm geared up to launch its first-ever exchange-traded fund.
With major ETF providers such as BlackRock, State Street, Vanguard and others covering almost every conceivable investment angle and possessing ample financial resources to properly market their funds, a new guy on the scene almost doesn’t stand a chance unless he comes up with a more compelling investment vehicle. And Gray is convinced he has.
Gray, a former finance professor at Drexel University, published a book in 2012 called Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. The book underpins the investment philosophy at Alpha Architect LLC in Broomall, Pa., a firm Gray created and where he and a team of other PhDs manage nearly $200 million in assets.
It’s also the foundation for two ETFs his firm launched late this year––the ValueShares US Quantitative Value ETF (QVAL), which started trading in October; and the ValueShares International Quantitative Value ETF (IVAL) that debuted last week.
Time will tell if Gray’s investing approach will translate into a popular ETF, but the methodology used for these funds has clear merits. While some funds focus on value metrics, forensic accounting screening or quality metrics, the ValueShares funds apply all of those angles in its quest to buy the cheapest, highest-quality value stocks.
Gray and his team also apply a dose of behavioral finance by scouring the market for hidden biases which often lead to a stock being misunderstood and mispriced. Gray and his team have developed a model based on their research efforts, they feed their investing algorithms into proprietary finance software to find a group of target stocks.
The goal is to maintain a portfolio that isn’t fully correlated with the broader market. “We systematically avoid closet-indexing,” says Gray, adding the goal isn’t merely to stay within range of a selected benchmark. There’s also little industry concentration. The top four holdings in the QVAL fund, for example, come from the medical device, online education, technology and auto parts sectors.
“Book readers and blog fans continually ask us if they can invest $10K, $20K, etc. with us,” he says. “But the reality of servicing small accounts means we would have to charge excessively high fees, something we simply don’t believe in. With an active ETF, we can manage any account of any size and at an affordable price.”
Gray isn’t the first investment author or asset manager to convert an investing concept into an ETF. But his firm’s go-it-alone approach stands out. Most of his peers tend to partner up with larger firms that have ample resources to launch and market a fund.