New Sponsor U.S. One Enters the ETF Ring Unprepared

U.S. One, Inc., a new ETF sponsor and fund manager, today (5/11/10) launched its first ETF product:  One Fund ETF (ONEF).  ONEF intends to provide pure asset class exposure to equities through a diversified portfolio covering 95% of global equity markets. Its holdings will represent more than 5,000 companies worldwide, including large, mid and small capitalization stocks, by investing in other ETFs.

In other words, ONEF is an all-world actively-managed ETF of ETFs with an expense ratio of 0.51%.  It will have to compete with industry giants that have size, cost, distribution, brand, and track history advantages.  This space is currently owned by passive index ETFs such as Vanguard Total World Stock (VT) with an expense ratio of 0.30% and iShares MSCI ACWI (ACWI) with an expense ratio of 0.35%.

The ONEF prospectus assumes the acquired ETF fees (the expense ratio of the ETFs it will buy) are 0.16%.  ONEF will add its 0.35% management fee on top of that for a combined 0.51% expense ratio.

The fund’s objective is to produce a diversified blend of U.S. and international stock market exposure with returns between the S&P 500 Index and the MSCI All Country World Index (ACWI).  The initial allocations indicate a 70% weighting to the US.

ONEF’s holdings page shows holdings of Vanguard MSCI US Prime Market 750 Index (VV) 49.7%, Vanguard MSCI US Small Cap 1750 Index (VB) 20.2%, Vanguard MSCI EAFE Index (VEA) 20.0%, Vanguard MSCI Emerging Markets Index (VWO) 5.1%, and iShares MSCI EAFE Small Cap Index (SCZ) 5.0%.

One Fund’s fact sheet states that its investment approach is based on its three beliefs that 1) stocks outperform, 2) market timing does not work, and 3) stock selection does not work.   This sounds like something a passive indexed product would say, but ONEF will be actively managed and not track an index.

The Advisor has no prior experience managing, or administering, an investment company.  One Fund also has no prior experience with assets under management and no track record. The portfolio manager currently does not manage any other accounts.  When buying an actively managed fund, most investors base part of their decision on the manager’s experience.  In the case of ONEF, there does not appear to be any.

A month ago, I stated that Old Mutual would have a tough time competing in this space when they introduced GlobalShares FTSE All-World Fund (GSW) on April 6, 2010.  Old Mutual probably now realizes I was right: after five weeks GSW has had zero trades.

ONEF has huge obstacles to overcome. The sponsor has entered an extremely competitive ring, yet appears unprepared for the battle ahead.  I predict ONEF will be near the top of my ETF Deathwatch when it becomes eligible in December 2010.

Disclosure covering writer, editor, and publisher: Long VT and ACWI. 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.