Pacific Investment Management Co. rolled out its long-awaited exchange-traded fund (ETF) on Thursday that aims to replicate Bill Gross’s flagship Pimco Total Return mutual fund.
The Pimco Total Return ETF is being watched carefully because it is managed by the world’s most famous bond investor and, if successful, could spur more investor demand for lower-fee, actively managed ETFs.
“The Total Return ETF harnesses Pimco’s time-tested investment process and our skills as an active manager,” said Mr.Gross, co-chief investment officer of the Newport Beach, Calif.-based investment firm. “We believe it signals an important phase in the development of the ETF marketplace.”
Mr. Gross’s new fund, which will charge a 0.55-per-cent fee, is expected to bring a lot of attention to the emerging active ETF space, according to Morningstar ETF strategist John Gabriel. “With a brand name like Pimco and a manager like Bill Gross, it’s almost legitimizing the concept.”
Unlike Mr. Gross’s $251-billion (U.S.) mutual fund, which can use a combination of options, futures and swap agreements, the ETF can’t invest in derivatives. The U.S. Securities and Exchange Commissions is currently reviewing the use of these investing tools for ETFs.
In the United States, there has not been strong growth in active ETFs because regulations require managers to reveal their holdings each day. U.S.-based BlackRock Inc., the world’s largest ETF provider, is seeking regulatory approval to launch active ETFs that don’t have to make public their holdings daily.
With an actively managed mutual fund or ETF, the returns depend on a manager’s calls and securities choices. Last year, Mr. Gross made a wrong bet on U.S. Treasury bond interest rates and it cost his fund.
Because he kept his fund largely out of Treasuries until later in the year, he missed out on the rising market value of older fixed-rate Treasuries as rates on new bonds fell. His fund gained 4.2 per cent last year.