PIMCO launches into the unknown

Last week, we saw the launch of one of the most hyped ETFs ever – PIMCO debuted an exchange-traded version of its Total Return Bond Fund (TRXT), the largest bond fund in the world. Top manager Bill Gross is set to manage it, giving this ETF a serious dose of star power. The move could, according to Gross, either push the bond firm flat on its face, or become a game changer in the fund management space. Either way, financial columnists, advisers and managers have weighed in on what PIMCO’s move means for the future of ETFs.

Here’s my top five list of what the launch of TRXT might (or might not) mean for the future of ETFs.

  1. Gross will manage TRTX – It’s the first time such a heavyweight name has been put behind an actively managed ETF. Sure, it’s great marketing – but will it really make a difference? Maybe, but Bill Gross isn’t getting any younger – in fact, he’s about to turn 68. How long can he be expected to sit at the helm? Whatever happens, this could mean we see more star managers brought in to help market and build the brand of some actively managed ETFs.
  2. TRXT could cannibalize PIMCO’s bottom line – Launching a low fee ETF based on a hugely popular mutual fund product is a gamble. But it’s a massive show of confidence in the ETF model by a veteran bond manager. This could lead other firms to do the same.
  3. TRXT can’t use derivatives – Gross has traditionally used derivatives to hedge risk in his active bond portfolio – something he won’t be able to do in the ETF. The question is, how can the TRXT track the Total Return Bond Fund if it can’t pull from the same toolkit? This is an important question investors will need to ask as they explore actively managed ETFs in the future.
  4. TRXT costs more for institutions – Institutional shares of the Total Return Bond Fund have an expensive ratio of around 0.46% — nine basis points less than TRTX at 0.55%. As actively managed ETFs proliferate, does that mean they won’t be courting the lucrative (and growing) institutional space?
  5. TRXT also costs more than Schwab’s – There are four other ETFs that replicate the Barclays Capital U.S. Aggregate Bond Index. That’s the same Index TRXT will be tracking. PIMCO’s TRXT is more expensive than the cheapest option offered by Charles Schwab (SCHZ) – SCHZ has an expense ratio of 0.10% versus 0.55% for TRXT. This begs the question – do we need to pay more for star managers in the ETF space? Will the added expense benefit investors down the road?