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Pimco's new ETF may lure advisers to active funds
March 1, 2012 / 8:02 PM / 6 years ago

Pimco's new ETF may lure advisers to active funds

* Advisers who never used active ETFs now considering

* First day volume indicates good start

By Jessica Toonkel

NEW YORK, March 1 (Reuters) - PIMCO’s much-anticipated Total Return Exchange-Traded Fund, which started trading on Thursday, could help change investor perceptions and propel the nascent actively managed ETF industry.

Actively managed ETFs make up just a fraction of the overall $1 trillion ETF industry, but experts say that having the Bill Gross name attached to an active ETF may attract new investors.

“If this does well because of the structural differences that an ETF offers, I may consider actively managed ETFs in the future,” said Ronald Scott Colson, president of Colson Financial Group Inc, an independent financial adviser who only uses index ETFs.

Thursday’s trading volume showed there was interest and liquidity in the ETF. By 2 p.m. trading in New York, the ETF had already traded more than 230,000 shares.

The top 200 most traded ETFs trade 335,000 shares daily on average, according to Morningstar Inc.

Pimco first announced that it would launch an ETF version of its $252 billion Pimco Total Return Fund last year, causing many industry experts to speculate that it may spark growth in the actively managed ETF industry.

The majority of the $1.2 trillion in ETF assets are in index-based ETFs, which are passively managed to follow the performance of their indices.

Actively managed ETFs, which have just about $4.79 billion, have a manager trading the portfolio, but unlike mutual funds, their trades can be seen by all investors on a real-time basis. As a result, many fund companies have been hesitant to launch actively managed ETFs for fear that outsiders will front run their trades.


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Speaking from his office in Newport Beach, Calif. after the opening of the market Thursday, Gross, founder and manager of the world’s biggest bond fund, said he expects the ETF to prove that active management works in ETFs.

“If it does as well as the Total Return Fund has done over 25 years, then instead of an index yield on the bond market which is about 2 percent ... investors can look forward to, not with a guarantee, but look forward to a three to four percent yield,” Gross told CNBC.

Financial advisers, even those who have been loyal to ETFs, also have been skeptical of whether actively-managed ETFs make sense.

“I am just not sure that the ETF structure has been good for active management because everyone can see what the manager is doing,” said Rich Romey, president of ETF Portfolio Partners Inc, a registered investment adviser with $80 million in assets under management.

But Romey, like other advisers, said that the Pimco ETF may be the one to change his mind on actively managed ETFs.

“It goes against our philosophy of using all index-based ETFs, but it’s Bill Gross and it’s fixed income,” he said. Romey said he will watch the Pimco Total Return ETF over the next six months to see how it performs before making a decision.

Similarly, Colson said he would wait until the fund has at least $100 million in assets before considering it. Colson said he might use the ETF as a venue for clients who want to park money in an ETF.

It may makes sense for investors to wait a bit before jumping in to make sure the ETF’s performance matches everyone’s expectations, analysts said. Unlike the mutual fund, the ETF will not be allowed to use derivatives, causing some concern about how well the ETF will track the mutual fund’s performance .

Gross attracted some unwanted attention last year when his fund’s performance stumbled related to his decision to bet against U.S. Treasuries. Investors pulled $5 billion form the fund last year.

But for financial advisers who expect interest rates to rise in the near future, the Pimco Total Return ETF can be a cheaper way to access Bill Gross, said Tom Lydon, president of Global Trend Investments, a registered investment adviser and editor of

The ETF will cost 55 basis points, near half of what retail shares of the mutual fund cost.

Although Lydon’s own personal strategy calls for him to apply his own active management using index ETFs, he said he is considering using the Pimco Total Return ETF for clients who just need a place to park money for awhile.

“If we see higher rates, we think Bill Gross can ride the waves,” he said. (Reporting by Jessica Toonkel and Sam Forgione in New York; Editing by Walden Siew, Bernard Orr)

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