Pimco, the world’s biggest bond fund manager, filed regulatory paperwork to create ETFs out of three existing actively managed mutual funds in a sign that it hopes to replicate the popularity that its Pimco Total Return Fund has enjoyed since it was rolled out in an ETF wrapper on March 1.
The Pimco Total Return ETF (BOND - News) has gathered $1.29 billion in just over three months, making one of the splashiest ETF rollouts in recent years , as we wrote in a recent story. The ETF, like the mutual fund, is run by legendary fixed-income money manager Bill Gross. The mutual fund, the biggest in the world, has $258 billion in assets.
The three new mutual funds the Newport Beach, Calif.-based firm wants to remarket in ETF wrappers, and their existing assets are:
- Pimco Real Return Fund (PRTNX), which has $23.24 billion in assets
- Pimco Low-Duration Fund (PTLAX), which has $21.28 billion in assets
- Pimco Diversified Income Fund (PDVAX), which has $5.63 billion in assets
The prospectus doesn’t appear to mention derivatives use, which would mean the new ETFs will operate with the same portfolio restrictions as BOND. The mutual fund version of the Total Return Fund can use derivatives, making it distinct from the ETF. A regulatory review of derivatives use in active and leveraged funds that began in March 2010 isn’t yet complete.
Pimco’s move suggests the firm co-founded by Gross is going to making a run at breathing life into active ETFs. The Pimco Enhanced Short Maturity Strategy Fund (MINT - News), a money market proxy, is already the biggest active ETF on the market, with $1.71 billion in assets, and BOND is likely to soon eclipse MINT.
As things stand, less than 1 percent of the more than $1.142 trillion in total U.S.-listed ETF assets are in active funds, though that percentage climbs to about 4 percent when looking solely at the fixed-income asset class. Pimco has a mix of active and passive fixed-income ETF strategies.
Some argue that Gross’ star status as an active money manager is exactly what will take active ETFs to the next level, though the riposte to that argument is that there are precious few whose star shines as brightly as Gross’ does.
Should the doubters’ views carry the day, active ETFs are likely to remain in something of a golden ghetto, particularly as indexing strategies—such as Rob Arnott’s “fundamental” indexes—move in quasi-active directions. Only time will tell which side is right.
Gross Won’t Run ETF Version Of PTLAX
The Pimco Low-Duration Exchange Traded Fund won’t be managed by Bill Gross, who heads the mutual fund version of the portfolio, PTLAX. Instead, the ETF version of the fund will be managed by Marc Seidner, a managing director at Pimco.
However, the other two funds detailed in the filing will be run by the same managers who run the respective mutual funds.
The Pimco Diversified Income Exchange-Traded Fund, the ETF version of PDVAX, will be headed by Curtis Mewbourne.
Also, the Pimco Real Return Exchange Traded Fund, the ETF version of PRTNX, will run by Mihir Worah.
Prices Not Detailed In Filings
The prospectus didn’t say how much the proposed ETFs would cost, or what their trading symbols would be.
That said, the pricing of BOND should provide investors with at least a preliminary sense of what to expect.
BOND has an annual expense ratio of 0.59 percent, according to Pimco's website, or 30 basis points cheaper than the mutual fund, though it’s possible to get the price of the Pimco Total Return Fund down to a no-load 46 basis points.
Assuming no sales charges, the annual operating expenses of the three mutual funds are as follows:
- Pimco Real Return Fund (PRTNX), 0.86 percent
- Pimco Low-Duration Fund (PTLAX), 0.80 percent
- Pimco Diversified Income Fund (PDVAX), 1.15 percent
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