All eyes on Pimco's ETF clone

FEB 06, 2012
Pimco, whose Total Return Fund is the biggest Kahuna in the mutual fund world, expects to make just as big a splash with the ETF version of the fund. Last week, Pacific Investment Management Co. LLC said that on March 1, it expects to launch the highly anticipated ETF version of its $266 billion Pimco Total Return Fund (PTTAX). Of course, bond guru Bill Gross, the fund's portfolio manager, has high hopes for the ETF version. He told attendees at a conference last week that he expects the Pimco Total Return ETF to follow in the footsteps of the fund by becoming the biggest ETF in the world, eclipsing the $95 billion SPDR S&P 500 ETF. “We're working with very large expectations here,” Mr. Gross said. More importantly for financial advisers, though, is that many mutual fund firms will be watching the fund closely, as well. Investors increasingly are turning toward ETFs instead of open-end funds. ETFs took in $121 billion in 2011, almost double the $67 billion that open-end funds received, according to Morningstar Inc. With the marketplace for passive, broad-based index funds already dominated by BlackRock Inc., The Vanguard Group Inc. and State Street Global Advisors, active ETFs are seen as a way for traditional mutual fund firms to get their foot in the door.

OTHER COMPETITORS

One firm in particular that could be watching closely is Ameriprise Financial Inc. In April, it acquired Grail Advisors LLC, along with its Securities and Exchange Com- mission exemptive relief to launch actively managed ETFs, but has yet to pull the trigger on any new launches. Ameriprise did not return calls seeking comment. Janus Capital Group and AllianceBernstein LP are among several firms that have filed with the SEC for the right to launch actively managed ETFs. But the filings generally are considered to be more of the “open in case of emergency” variety than genuine product initiatives. Janus declined to comment and AllianceBernstein did not return calls seeking comment. “The Pimco ETF is like a test case,” said Paul Justice, an ETF analyst at Morningstar. “Money managers are going to be watching closely to see if they can do the same thing with their flagship funds.” If the Pimco Total Return ETF fails to collect significant assets — and we're talking billions, not millions, here — it could dampen enthusiasm for actively managed ETFs in general. Actively managed ETFs have been around since 2006 and there are more than 25 trading today, but none except for the $1.8 billion Pimco Enhanced Short Maturity Strategy ETF (MINT) has managed to gain significant assets. On one hand, the timing of the launch couldn't be worse. The Pimco Total Return Bond Fund is fresh off its first year of net outflows since 2003. Last year, the fund trailed 69% of its peers among intermediate-term-bond funds, as it missed out on the Treasury rally spurred on by a flight to safety in light of the sovereign-debt crisis in Europe. “Over a long period of time, we've done well,” Mr. Gross said. “And we hope we can do as well with the ETF as we've done with the fund over the past 20 years.”

FIXED-INCOME ETFS

On the other hand, however, adviser interest in fixed-income ETFs has never been higher. Taxable-fixed-income ETFs had approximately $43 billion in inflows in 2011, a 39% increase year-over-year, and second only to domestic-equity ETFs. The acceptance and awareness of fixed-income ETFs has grown along with the number of products, Mr. Justice said. At the beginning of 2007, there were only six fixed-income ETFs available. Today there are more than 140. Jennifer Failla, principal at Failla Financial Management LLC, is one adviser who's particularly excited about the impending launch of the ETF version of the Pimco Total Return Fund. While Ms. Failla mainly uses ETFs for her clients, the Pimco Total Return Fund is one of the few mutual funds she does use. Ms. Failla is mainly interested in the Pimco Total Return ETF because of its expense ratio — the ETF will charge 0.55%, while the retail share class of the mutual fund charges 0.9% — but how it performs will affect her views on actively managed ETFs in general. “If Pimco does a good job, it would certainly set a precedent,” she said. Having an ETF version of an actively managed mutual fund allows fund managers to “break down the distribution channels,” Mr. Justice said. Because ETF shares trade intraday on an exchange, they are available to anyone with access to the exchange. “We're very proud of the relationship we have with retail firms and our existing distribution channels,” Mr. Gross said. “But here's a chance for small investors to get access to it.” [email protected]

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