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.