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.”