Pimco filed today with the SEC to launch an actively managed version of its popular Total Return Fund, the biggest and most popular bond fund in the world.
The Pimco Total Return Exchange-Traded Fund, as the fund will be called (proposed symbol: trxt), will be managed by Bill Gross, who has become somewhat of a bear lately on government debt — selling all of it from the Total Return Fund.
This move by Pimco could shake up the world of ETFs, where the rise of actively managed funds has been simmering as the next big thing.
“This is a game-changer,” says Scott Burns, head of ETF research at Morningstar. With Pimco already running four actively managed ETFs, the firm and Gross “have validated that active ETFs are feasible and can be modeled after the largest of strategies available today.”
Ironically, the Pimco filing coincides with increased scrutiny of ETFs. As I wrote earlier today, the Bank for International Settlements and the International Monetary Fund, among others, are sounding sirens about the possible “systemic risk” associated with ETFs.
Unlike traditional ETFs, which track an index, actively managed funds employ a manager who actively picks investments, including other ETFs as well as individual stocks and bonds. One example is the recently launched Active Bear ETF, which shorts stocks based on forensic analysis.
So far, according to Morningstar, there are 31 actively managed ETFs versus more than 1,000 passive ETFs. (You can read Morningstar’s take on the proposed Pimco fund here.)
Pimco isn’t alone among larger firms diving into the actively managed ETF space. Eaton Vance and BlackRock — via its iShare — have been given the regulatory green light to launch actively managed ETFs, while Ameriprise/Columbia funds have announced their intentions to purchase Grail Advisors, the pioneer of actively managed ETFs.
The big question for many investors: Why not just a closed-end fund?
One negative of closed-end funs, says Burns, who oversees ETF and closed-end research at Morningstar: “Premiums and discounts — and you have to do an IPO, which historically isn’t a winner for investors. In the ETF, you can right-size the ETF shares to meet demand...and” — for better or worse — “you can also buy it on margin.”
Meanwhile, according to its SEC filing, the new Pimco ETF will invest at least 65 percent of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities. While most will be high quality bonds, the fund also says it can invest up to 10 percent of its assets in junk bonds and 15 percent in emerging markets, with foreign currency exposure limited to 20 percent.
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