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 Total Return ETF will be managed by Bill Gross and will pursue the same objectives as PIMCO’s Total Return Fund, which is the largest U.S. mutual fund with $250 billion in assets. However, the ETF is not going to be an exact duplicate of the mutual fund. This is because the Total Return Fund has no limits on usage of derivatives (which the fund uses extensively)
“Because Bill Gross can move markets, the Total Return ETF will be the first active ETF that truly risks front-running. If this ETF shows that it can successfully navigate that risk, it should ease some firms’ fears about daily portfolio disclosure in an active ETF – fears that have held some portfolio managers back from considering an active ETF,” said Fox. “A Total Return ETF that grows quickly and avoids front-running could inspire more firms to launch active ETFs. That potential makes TRXT’s March 1 debut the most important U.S. ETF launch of 2012.”
“Many traditional mutual fund firms are eyeing the active ETF space as a possible way to participate in the rapidly growing ETF market. More than two dozen firms have filed papers and are waiting for the SEC approval needed to launch an active ETF, including AllianceBernstein, Dreyfus, Janus, JP Morgan, Legg Mason, T. Rowe Price, Vanguard and others. PIMCO’s Total Return ETF could accelerate the urgency of entering the active-ETF space,” Fox said.
PIMCO’s Total Return ETF will carry an expense ratio of 55 basis points (bps), lower than the 90 bps expense of Total Return Fund’s A Share Class. It is more expensive than the 46 bps cost of the mutual fund’s Institutional Shares, which hold 60% of the fund’s assets, but the Institutional shares require a $1 million minimum investment. “The Total Return ETF could attract price-conscious small investors. In so doing, the ETF could represent new distribution channels for the strategy,” said Fox.
In covering the PIMCO Total Return ETF debut, feel free to turn to Strategic Insight, a leading source of ETF market intelligence. Strategic Insight is available as a source on active ETFs, the current ETF marketplace, and the future directions of ETFs and investing.
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