Yield of Dreams

Could PIMCO’s New Active ETF Turn Advisor Heads?

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Total Return Manager Bill Gross

PIMCO’s new Total Return ETF (ticker: TRXT) started trading on the NYSE today, and the buzz has not stopped. The new fund is an active ETF based on PIMCO’s highly successful Total Return Bond Fund. But it’s been hard for active ETFs to gain traction, especially with advisors. There are very few of them, and most of the managers are smaller and less well-known brands. Could the new PIMCO fund be the bellwether active ETFs need to gain traction among advisors?

Morningstar ETF strategist Paul Justice seems to think so. He points to a Cerulli Associates survey of advisors’ opinion on active ETFs, which basically found that FAs haven’t formed an opinion around active ETFs:

So [active ETFs] may have been around for a couple of years, but it wasn't something that they were observing because it wasn't a manager that resonated with them. This is a time that they could really reset their point of view and establish it over the next couple of years, and perhaps say, "Yes, active ETFs are something I want to have."

Strategic Insight also expects the fund to be a test of the success of active ETFs:

Despite much attention, active ETFs have not gained much traction. At the end of January, the U.S. had just $3.7 billion invested in 33 actively managed ETFs – ETFs that do not try to track a benchmark index. That amounted to less than half of one percent of the $1.15 trillion ETF market, according to Strategic Insight data. Of that $3.7 billion in assets, 48% of them are in the largest active ETF, PIMCO’s Enhanced Short Maturity Strategy ETF (Ticker: MINT), a $1.8 billion fund that is an alternative to money-market funds.

“PIMCO’s Total Return ETF will be the first brand-name active ETF with a well-known fund manager behind it, and so it will be an important test case for the potential popularity of the ‘active ETF’ product structure,” said Loren Fox, head of ETF research at Strategic Insight. “We expect it to easily surpass MINT in its first year to become the largest active ETF. How big TRXT will become remains to be seen.”

The financial press is also buzzing about whether the fund will pave the way for other mutual fund providers to launch ETF versions of their strategies. The fund’s manager Bill Gross has come out and said he expects the fund to become the largest ETF in the world. What a statement…

Gross has also said the ETF will be “basically the same” as the mutual fund strategy, according to published reports. But what does that mean exactly? I think advisors owe it to clients to know the answer to that question before shelling assets into it. The Reformed Broker Joshua Brown, featured in our March issue, wrote on his blog that he wouldn’t recommend the fund because it’s still too early and new. Sure, it’s lower cost, but at what price?

To discuss more on the PIMCO launch, join our Tweetup at 1 p.m. ET using hashtag #regreptalks to chat.

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Casting a gimlet-eye on asset management issues.

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