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.

By Gray’s math, it costs $300,000 to $500,000 just to launch a fund (most of which goes toward legal and regulatory costs). And considering it takes another $150,000 or more to administer the fund each year, he says a firm needs $25 million to $30 million in assets under management just to break-even.” To date, the QVAL fund has more than  $22 million in assets, while the just-launched IVAL fund is sitting at about $2.5 million.

Persistent operating losses at thinly traded funds has led to an average of roughly 50 ETF closures a year, according to Morningstar. Gray and his team at Alpha Architects were able to launch and operate their two funds without too much financial strain because the firm already generates much of the overhead in its existing asset management business.

Gray takes a dim view of the launch efforts by firms without a corresponding asset management unit to support it. “Many ETF providers launch with a few million in an ETF and burn deep holes in their pocket every month,” he says. “This is a high-risk, high-reward business model.”

Still, even the industry’s biggest firms selectively cull some funds from the herd every year, especially those that trade less than 50,000 shares a day. QVAL on average trades roughly 23,000 shares daily. If history is any guide, it will take at least several months for the IVAL fund to reach that threshold.

QVAL carries a 0.79 percent expense ratio while its international counterpart carries a heftier 0.99 percent expense ratio. Those expenses are higher than passive ETFs, yet a bit cheaper than most other actively managed ETFs. It’s too soon to know whether these young ETFs will deliver the superior risk-adjusted returns that Gray and his team anticipate. But the approach and methodology are sound, and these ETFs have the virtue of not being just another “me-too” offering in an already crowded field.