February’s much-hyped launch of the PIMCO Total Return ETF was a huge deal in the investment space, and one I thought might be a game changer for both active managers and ETF providers down the road. Not only is bond star Bill Gross managing it, an ETF version of the world’s largest mutual fund has the potential to cannibalize PIMCO’s bottom line and further accelerate the flow of mutual fund assets into cheaper ETFs.
Clearly, after a month of trading, PIMCO’s ETF bet appears to be paying off. In its first month on the market, the Total Return ETF has around $340 million in assets under management with 200,000 shares traded daily. It has returned 2.52% from its February 29 launch through to April 12 and it has done this without using derivatives – a big part of the Total Return Bond Fund the ETF tracks.
I asked Canadian ETF expert, Mark Yamada, President of PUR Investing Inc., what he thinks of PIMCO’s move into ETFs and what it means for the future of active management. Yamada believes PIMCO’s success in the ETF space is evidence of just how ready investors are for actively managed ETFs, especially in the fixed income space where active management is key.
Currently, actively managed ETFs represent a small portion of the $1.65 trillion ETF pool. That could change as managers like Gross attach bring star power into the space. Yamada thinks Gross’ brand will give his ETF a boost, especially in the United States where Americans love to believe in their celebrities (think Warren Buffet). However, Yamada also says successful ETFs like PIMCO’s are further evidence that ETFs are a more efficient way to deliver returns than mutual funds. “ETFs are superior,” he adds. “An ETF trades all through the day, making them more efficient and transparent. They’re also cheaper.”
ETFs won’t eliminate active management – but Yamada says they will ultimately transform the retail space. “It will be the great unwashed retail investors” who are searching for a cheaper and easier way to invest — ETFs fit the bill.
Whether or not that success will translate to the institutional space remains to be seen – right now, hedge funds are upping their ETF usage. Other large investors (plan sponsors included) could follow suit as ETFs grow in size, scope and liquidity.