PIMCO's Total Return ETF Means Bad News for Mutual Funds

Henry Truc  |

The tug-of-war between exchange-traded funds and mutual funds has been relatively quiet for the past year. But the news that bond giant PIMCO intended to create an actively managed ETF version of its Total Returns Fund definitely was a big score for ETF investors. Mutual funds, which have traditionally attracted most retail investors through retirement accounts and such, had seen a lot of its dominance wane as investments in ETFs have continued to grow. But while ETF investments have slowly eaten away at the mutual funds hold of the financial market, the trend hasn't really seen a major shakeup until this news.

The PIMCO Total Return Fund (PTTAX) is the world's largest mutual fund with assets totaling over $235 billion. The fund is managed by Bil Gross, PIMCO's co-founder, and is made up of mostly investment-grade debt securities and derivatives like options and futures.

PIMCO Total Return ETF

The fact that PIMCO is looking to enter the ETF realm is a big deal in the actively managed funds space. While PIMCO does offer ETFs in its product portfolio, the difference between the Total Returns ETF is that it will be actively managed. This is different than most ETFs, which usually track an index and are passively managed.

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Another major issue with creating an ETF with the same strategy of a mutual fund is that ETFs are required to disclose their holdings daily. Many active fund managers aren't comfortable disclosing all that information to the public, mainly because they don't want copycats stealing their strategy. But the market for actively managed ETFs is still mostly undeveloped. While ETFs have gained in popularity, actively managed ETFs are still a very small piece of that pie. Perhaps PIMCO believes it the market has potential and wants to get in early.

Actively Managed ETFs

According to the Wall Street Journal, ETFs have built up $1 trillion in assets over nearly two decades, but actively managed ETFs only make up about 1 percent ($4.3 billion) of that. But to be fair, actively managed ETFs were approved by the SEC only three years ago. The first ever actively managed ETF was the Grail American Beacon Large Value ETF (NYSE: GVT), but it failed to gain much traction among investors. But, two years ago, the financial markets were also speeding off a cliff.

Here is a list of other actively managed ETFs:

  • Peritus High Yield ETF (NYSE: HYLD)
  • AdvisorShare Active Bear ETF (NYSE: HDGE)
  • PowerShares Active Mega Cap (NYSE: PMA)
  • PowerShares Active AlphaQ (NYSE: PQY)
  • Pimco Enhanced Short Maturity (NYSE: MINT)
  • WisdomTree Dreyfus Chinese Yuan (NYSE: CYB)
  • WisdomTree Emerging Markets Local Debt (NYSEArca: ELD)


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