Investors, financial advisors and the mutual fund industry will be closely watching the performance of the ETF version of PIMCO Total Return Fund after it launches on March 1. If the ETF is able to closely track the return of Total Return Fund, it could be the first step in a migration of assets from traditional mutual funds to ETFs.
PIMCO plans to introduce an ETF clone of Total Return Fund, which holds over $250 billion in assets. The vaunted fund, which launched in 1987, is managed by PIMCO co-founder and bond guru Bill Gross.
The ETF will have an expense ratio of 0.55%, according to the prospectus, compared with 0.46% for the institutional share class of PIMCO Total Return Fund. [Will PIMCO ETF Mark Beginning of the End for Mutual Funds?]
The PIMCO bond fund is the largest mutual fund in the world and if the ETF “can come close to tracking the mother ship, there will be a lot of switching done, starting with RIA firms like mine,” says Josh Brown, a financial advisor at Fusion Analytics. [PIMCO ETF Puts Spotlight on Mutual Fund Fees]
The ETF won’t be able to invest in derivatives due to regulatory constraints, while Gross at Total Return Fund is known for his use of derivatives in the bond portfolio.
Advisors will watch to see if the ETF tracks the main fund, said Brown, who runs The Reformed Broker blog. On a conference call Thursday hosted by AdvisorShares, he said he doesn’t expect a “huge switch” right after the ETF lists in March, but if it tracks PIMCO Total Return Fund well at the end of the year, “then the floodgates will open.” [Three Things You Need to Know About Active ETFs]
‘Sink or swim’
Morningstar’s director of ETF research Scott Burns said advisors will likely want to see between six and nine months of performance before considering the switch to the ETF, rather than the typical three-year track record for new funds.
He added one reason PIMCO Total Return Fund uses derivatives is because of its huge size, so it could actually be easier in some respects to manage the ETF version. Investors may also like the ability trade the ETF as well as its transparency and tax efficiency, Burns said.
If investors do migrate to the ETF class, other big fund companies will likely follow PIMCO’s move into active ETFs.
Fund firms will “see this is sink-or-swim time,” Brown said. It could be a “monumental change” for how investors get active strategies in their portfolios.
“It’s not an active versus passive discussion – it’s a wrapper issue,” he said.
Morningstar’s Burns said his firm views ETFs primarily as a new technology, and that the business grew up as index-based products as a result of SEC regulation. ETFs bring the low fees that institutional investors enjoy to all investors, and are disrupting the distribution of financial products because they’re not based on commissions, he said. More money is going into fee-based strategies in which advisors are compensated by a percentage of assets, rather than commissions.
Brown said he’s using more ETFs and less open-end funds in client portfolios. ETFs are often more convenient and don’t have minimum investments and other “hassles,” he said.
“PIMCO is making a defensive rather than offensive move with Total Return ETF,” Brown said. “Clients are going to be doing more advising and less brokering.”