Will PIMCO ETF Mark Beginning of the End for Mutual Funds?

February 1st at 9:59am by John Spence

The launch of PIMCO Total Return ETF next month could represent a major turning point for traditional mutual funds.

PIMCO is introducing an exchange traded fund clone of the world’s largest mutual fund. The launch will allow any investor with a brokerage account to get low-cost, liquid access to PIMCO’s vaunted bond manager, Bill Gross. [PIMCO Says Total Return ETF to Launch in March]

An ETF version of Total Return Fund will have big ripple effects for the investment-management business, which is dominated by mutual funds, observers say. The ETF is expected to start trading in March. [A Look at PIMCO's Planned ETF]

More mainline asset managers that oversee active funds could follow PIMCO into the ETF business. The bottom line is that ETFs offer a more investor-friendly “wrapper” due to their low expense ratios, tax efficiency, transparency and ability to buy and sell during the trading day.

Scott Burns, director of ETF analysis at Morningstar, says the asset-management industry is asking the wrong questions about active ETFs.

In fact, it should just stop thinking about “ETF investors” altogether and simply think about “investors,” he notes.

“Ultimately, investors want and deserve all of the advantages the ETF structure and stock exchanges can provide whether the underlying strategy is active or passive,” Burns wrote in a commentary Wednesday. “For their part, fund companies and the broader asset management community need to open their eyes and start asking the right questions to the right people. In the end, the investor is going to get what he or she wants — one way or another.”

The vast majority of ETFs currently on the market are passive funds that track benchmarks. There are some ETFs that follow quantitative, rules-based indexes that incorporate elements of active management in an effort to beat the market. There are also several purely active ETFs, although none that boast the pedigree and track record of a Bill Gross.

Josh Brown at The Reformed Broker blog thinks the launch of PIMCO Total Return ETF marks the opening salvo in the demise of mutual funds. Active ETFs will be a major trend in 2012, he predicts.

“I think you’re going to see star managers enter this space,” Brown said. “They see that there’s a ton of money to be raised. It’s going to be the new wrapper of choice.” [Active ETFs Seen Taking Off in 2012]

In a recent piece for Fortune, Brown covered the launch of PIMCO Total Return ETF, but from the perspective of a decade in the future.

“PIMCO saw an inevitability that the other mutual funds were slow to accept,” Brown wrote. “They saw that as brokers morphed into advisers, broker-sold products like mutual funds would eventually lose assets by attrition (there once was an old saying that “mutual funds are sold, ETFs are bought”). PIMCO recognized that what people hated most about their mutual funds were their high expense ratios, the 12-b1 marketing fees and the inflexibility of a product that could not be purchased or liquidated until after the market close each day.”

He concludes: “The mutual fund industry died from a thousand cuts — but it was PIMCO who drew the first blade in 2012.”

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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