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Today Bill Gross launched his PIMCO Total Return ETF (NYSE Arca: TRXT), hoping his move into actively managed ETFs will be a "game changer" for a market that's failed to flourish.
Gross manages the world's largest mutual fund at $250 billion. His Total Return Bond Fund has averaged a 6.3% annualized return over the past 10 years. Now he wants to expose more investors to his fund through an actively managed ETF version.
Gross also hopes his TRXT launch will jumpstart actively managed ETFs, which so far have been a largely ignored market.
ETFs typically hold baskets of stocks while trading throughout the day. Active versions combine the skill of selecting securities with the lower fees, market trading and tax advantages of ETFs.
"Small investors don't always have access to active management with a higher yield and a higher total return," said Gross, who is co-chief investment officer at PIMCO. "We are hoping "mom and pop' can do a little bit better than the bond market at a time of historically low yields."
Can Gross and TRXT deliver on the hype?
The PIMCO Total Return ETF (TRXT)
Bill Gross' ETF will have the same investment goals as the mutual fund, but aims to attract smaller investors through some key differences.
First, it's cheaper.
PIMCO will charge 0.55% for the ETF, compared to the 0.9% fee for the mutual fund. That's $5.50 a year for every $1,000 invested.
Not only will it give investors a break in fees, it'll allow them to be exposed to all-star investment performance they normally couldn't afford.
"The PIMCO Total Return Bond Fund is a behemoth of a fund, so one of the things it's got going for it is it's got economies of scale," Tom Roseen, a research manager with Lipper mutual fund information company, told Reuters. "But in addition, because it's an ETF, it actually has low trading costs, and it's going to put pressure on other funds in the community whether it be ETFs or open-end funds to actually drive down those expenses because they need to stay competitive as well."
If PIMCO successfully triggers more interest in actively managed ETFs, mutual funds could look to cut fees that are usually double that of TRXT. Average annual mutual fund fees hit about 1.22 basis points, compared to the average ETF fees of 0.85, according to Reuters.
Second, the ETF won't have any exposure to derivatives. The bond fund includes interest rate and credit default swaps, options, and currency forwards and swaps.
Derivative investing helps hedge risk, but limited derivative exposure could actually help investors, according to Money Morning Global Investing Strategist Martin Hutchinson.
"Performance will deviate since it is restricted from dealing in derivatives," said Hutchinson. "However that's a very good thing, since it avoids the "tracking error" which makes derivatives-based ETFs poor models of what they claim to provide."
Comparing the performance of the PIMCO Total Return ETF to the bond fund over time can tell how imperative derivatives are to Gross' investing success.
TRXT also will offer investors trading advantages when it comes to pricing. ETFs are priced throughout the day, allowing investors to trade them at a better price than if they had to wait until the close, when mutual funds are priced.
Can Bill Gross Recharge Actively Managed ETFs?
Not everyone is convinced Bill Gross' active ETF move will lead to the investments becoming popular.
"PIMCO is simply growing its business and transitioning into the ETF markets like many mutual fund operators have," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "I have not seen anything that would indicate an advantage in terms of management style, alpha or otherwise."
Investors haven't yet caught on to active ETFs. The funds invested in actively managed ETFs make up only 0.4% of the total U.S. ETF market.
PIMCO already has the largest actively managed ETF, the Enhanced Short Maturity Strategy Fund (NYSE Arca: MINT) with about $1.4 billion in assets.
While mutual fund companies are interested in the ETF space, there's no evidence that investors will follow – something that Gross' launch this week will gauge.
"There is a lot of fever on the supply side, but I don't think that anyone has checked to see if there is demand," Ben Phillips of Casey Quirk, a consultant to asset managers, told The Financial Times.
Bond fund managers have refrained from putting out ETF versions of their investments because that requires daily disclosing of their holdings. Many managers were afraid this would lead to front-running.
Also, lower funds cut into profit margins.
But mutual funds could be interested in the space since they've already been losing investors to passive ETFs.
A total $118 billion of ETF shares were issued last year, compared with redemptions of $130 billion from U.S.-registered equity mutual funds and deposits of $125 billion into bond mutual funds, according to the Investment Company Institute (ICI). Total ETF assets have increased more than 10-fold over the past decade, making them the fastest-growing product in the money-management industry.
"Bill Gross will move markets. Bill Gross will attract arbitrage interest," said Loren Fox, a senior research analyst at Strategic Insight, told Reuters. "So if his ETF can successfully navigate the daily disclosure of the portfolio, that would go some way to easing anxieties among traditional fund managers into going down the path of an actively managed ETF…"
News and Related Story Links:
- Money Morning:
Money Morning's Fitz-Gerald On PIMCO Bond Sell-Off and Stock Market Drop
- Money Morning:
These Four Dividend Stock ETFs Can Add Pop to Your Portfolio
Bill Gross' PIMCO Total Return ETF could transform industry
- The Financial Times:
Pimco active ETF launch seen as potential "game-changer'
Gross: Pimco's Active ETF For Small Investors