Update: Bear Stearns Current Yield began trading on the American Stock Exchange this morning. That makes Bear the winner of the race to launch the first actively managed ETF. The rest of this posting--which we made a few weeks back--still applies.

Bear Stearns amended the registration statement for its forthcoming actively-managed short-term bond ETF, Bear Stearns Current Yield, which will trade under the ticker YYY. The fund, which is nearly a year in the making, will levy a 0.35% expense ratio. No word on when it'll launch. To our knowledge, Bear is the first to disclose what its actively-managed ETF will cost investors, making the filing noteworthy in that respect.

Quick Thoughts

- 0.35% is on the inexpensive side for an ultra-short bond mutual fund, which I'm assuming is the correct classification (180-day weighted-average maturity, per the prospectus). For instance, the median ultra-short bond fund with a $3,000 investment minimum or less is about 80 basis points (65 bps if limited to no-load funds). At 0.35%, the fund would rank among the cheapest ultrashort bond vehicles available to retail investors. If the Bear fund is, in fact, a short-term bond fund, then the comparisons would be even more favorable.

- The fund isn't cheap because Bear is cutting investors a great deal on the management fee (0.30%), which is slightly below the median when compared to the management fees levied by its no-load ultrashort mutual fund rivals. Rather, it's cheap because it's not saddled with transfer agency expenses like traditional mutual funds. Those fees range from 10 to 25 basis points for most no-load ultrashort bond mutual funds. By contrast, the Bear ETF will levy just 5 basis points to cover 'other' expenses.

- No word on how the management fee compares to the fee they levy on analogous private accounts. (We emailed a request to a Bear rep to get the ADV Part II for what appears to be a comparable institutional strategy...so far, no response...if we hear, we'll update this accordingly). There are no breakpoints on the management fee. In due time we'll get some weak annual report boilerplate language explaining that there aren't economies of scale due the fund's small size, yaddayaddayadda...logic which mistakes 'business' (i.e., fund at its current small size) for 'business model' (i.e., asset management, which is quite scalable at the level of the individual strategy...is Bear going to hire 20 more analysts when the fund goes from $200MM to $4 billion?).

- Though this isn't a new element, Bear updated the fund's disclosure concerning the fund's ability to levy a 12b-1 fee. Specifically, they've given an approximate date (sometime in 2009) by which the board could authorize a 12b-1, not to exceed 0.10%. Yes, we've seen these types of disclosures elsewhere. And, no, it's not unusual for a board to retain the leeway to hike expenses in the future only to hold the line (example: extending fee waivers, not recovering waived fees, etc.). But the amendment to the prospectus language is striking nonetheless for its specificity. Stated differently, do you amend the prospectus language in this manner if you're not at least semi-seriously weighing the option?

- We've covered it elsewhere, so I won't belabor the point...but the fund will be 'full-blown active' with daily portfolio disclosure. In other words, the manager isn't much concerned about getting front-run. I think that illustrates a point--investors have to want to front-run your trades. It doesn't just, sort of, happen. Instead, traders have to want to get in front of a large volume of money and if you ain't got the money, you ain't gettin' front-run. Obviously, the more illiquid the securities concerned, the lower the asset threshold, as even smallish trades could ostensibly move the needle in those cases, thereby presenting an opportunity to front-runners. Yet, provided it doesn't overrreach (helloooo SIVs), this fund is going to be playing in a very, very liquid part of the market. Thus, even though the manager was hauling around approximately $4.7 billion in institutional money as of 12/31/06 (per the prospectus), at least a portion of which is run in an analogous style to this strategy (meaning that you could have traders trying to jump in front of a larger pool of assets than just this ETF's holdings), the manager is apparently still not all that worried about getting front-run. I guess that's reassuring. But like I pointed out in that earlier riff, the flipside of all of that liquidity is efficiency--it's a lot harder to add alpha when you've got that much money sloshing through a market.

Takeaway

It seems like a no-harm, no-foul kind of product, especially given its cost, which isn't egregiously high. But, as with the other actively managed ETFs I've encountered, I question the excess return potential given the nature of the markets concerned, most of which are highly liquid and, one would think, pretty darn efficient. Those markets lend themselves well to the actively-managed ETF structure, which depends on successful management of the tension between transparency (to market-makers, end-users) and opacity (to protect the manager concerned about front-running). But it's hard to think that they're ideally suited to managers seeking to capture alpha. Stranger things have happened, of course. But I'd get no more excited about this offering than I would, say, the typical run-of-the-mill low-cost actively-managed short-term bond fund.

iPod Shuffle

I love music. Here's what's shuffling in my iPod at the moment. Maybe I'll weave this in occasionally, ye' indulgent readers permitting.

• Kelly Clarkson 'Since You've Been Gone'
• Daft Punk 'One More Time/Aerodynamic'
• Greg Laswell 'Girls Just Wanna Have Fun (Demo)'
• The Helio Sequence 'You Can Come to Me'
• Explosions in the Sky 'First Breath After Coma'
• Earlimart 'Happy Alone'
• Jonny Greenwood 'There Will Be Blood' (Soundtrack)