Pacific Investment Management Co.'s plan to launch an actively managed version of its popular Total Return Fund, overseen by its founder, Bill Gross, may well turn the tide for actively managed exchange-traded funds.
The California bond fund giant filed April 20 with the Securities and Exchange Commission to launch PIMCO Total Return ETF, which will invest 65% of its assets in a diversified portfolio of bonds, primarily investment grade and of varying maturities.
The launch of an active ETF version of the $236 billion PIMCO Total Return fund, the world's largest fund, shows that most active strategies can be turned into ETFs and will likely be followed by more entrants among big-name active managers.
"It's a game changer," said Scott Burns, director of ETF analysis at Morningstar Inc. "This is the validation that this corner of the ETF industry has been waiting for. A large, prominent fund manager with a strategy that is the largest out there — anyone who says it can't be done and won't be done — those excuses are completely blown up right now."
Low-cost ETFs can be bought and sold on the stock market and must disclose their holdings daily. Fears that investors would front-run active managers' purchases if they adopted such transparency had held some fund companies back from launching active versions of their most popular funds. "If a fund like Total Return can go out as an ETF then, basically, almost any strategy can go out as an ETF," Burns said.
The ETF industry hasn't before seen the "big brand of personalities" that exist in the mutual fund space, said Tom Lydon, president of Global Trends Investments. "But now, having an ETF with PIMCO brand, the Bill Gross name and replicating a very successful fund in the Total Return Fund, its flagship fund, this will put a lot more light on active strategies in the ETF space."
The development is great for investors, Burns said. While PIMCO did not disclose the new ETF's expense ratio in its filing, the cost will likely be lower than that of its PIMCO Total Return Fund sister. Total Return charges a net expense ratio of 0.90% on retail shares and 0.46% on institutional shares, according to Morningstar.
PIMCO said it cannot comment during the fund's registration.
But Robert Goldsborough, an ETF analyst at Morningstar, noted that PIMCO's filing alerts investors that the proposed ETF's investments and results "are not expected to be the same as those made by other funds for which PIMCO acts as an investment adviser." PIMCO is telling investors that the proposed ETF may be managed differently or trade after the mutual fund makes its trades, he said in an analysis. Investors who want to jump ship from the Total Return Fund in search of a lower fee from the ETF version may see different results, Goldsborough cautioned.
Actively managed ETFs with big-name managers could well threaten the retail share-class mutual fund distribution model, Burns said. "You cut out the middleman, and it will cost less," he said. "The tide was already turning against active management in a fee-based world. If you can deliver [this type of fund] on an open-access platform that independent advisers can access, then active management can start to turn the tide a little."
Lydon said he expects more active managers to follow PIMCO's move. "Now, with more than 11,000 ETFs and more than $1 trillion in assets, there are other big-name fund managers that you're going to look at and say there's a void if they don't have an ETF offering. They probably will only be able to make an impact if they have an active one, because all the pure beta areas are already populated."
