Wed, 29 Feb 2012
The launch of PIMCO's new fund Total Return ETF may prompt advisors and individual investors to reset their point of view about active ETFs over the next couple of years, says Morningstar's Paul Justice.
Jason Stipp: I'm Jason Stipp for Morningstar. A big day in the ETF industry: PIMCO Total Return launches in an ETF format. Here with me to discuss that launch and what it could mean for the industry is Paul Justice. He is an ETF strategist and also editor of Morningstar ETFInvestor.
Thanks for joining me, Paul.
Paul Justice: It's great to be here. I think the possibilities are pretty wide open.
Stipp: So, we have talked about this launch in the past, and we have some good content that we are going to refer readers to, with some of our takes on the fund. We know a couple of new things about the launch, but not necessarily a whole lot of new information. What do we know today that we hadn't been able to talk about before?
Justice: Well, first we get a ticker. We got TRXT coming out on the exchanges [Thursday]. We have a concrete date, saying this is going to be available for you to actually buy. Now do I expect everybody to rush in and put billions of dollars in here? No, it will probably launch with a lot of news around it and a whisper in assets. But that doesn't mean they can't accumulate over time, over the course of the next year, and get something substantial in there, and be a viable option as a potential substitute to other fixed-income mutual funds or ETFs in the market.
Stipp: ... This isn’t the first active ETF that has launched, but it is one of the biggest marquee names of an active ETF that has launched. You have some ideas on where this might make a big splash. We know that the PIMCO Total Return mutual fund is very, very popular. Which different channels of the investment world do you think this ETF is really going to make it big?
Justice: So, you basically write off the entire 401(k) space. It doesn't make sense in there anytime you're making those contributions, and that's a big part of the holdings for PIMCO Total Return. Any of the institutional shareholders that are getting a better price through that share class than the ETF's 55 basis point fee, there's no reason for them to switch. There are some flexibility issues that would go on about reinvesting dividends. So, I think staying with those funds in those cases makes a lot of sense.
But if you're a retail investor ... or an advisor who is using maybe the Harbor Bond products that are paying substantially more than the 55 basis point fee, or you're one of the other investors that didn't have access to the product before through your direct channel, this is a good option for you.
Stipp: We also got some information on how advisors are viewing active ETFs in a recent survey. It showed some interesting results. What do you take away from that survey and what do you think it means given that we've seen this big launch now?
Justice: It was an interesting piece by Cerulli Associates. They were basically saying that most advisors, institutions, investors of all ilk haven't really formed an opinion around active ETFs. So [active ETFs] may have been around for a couple of years, but it wasn't something that they were observing because it wasn't a manager that resonated with them. This is a time that they could really reset their point of view and establish it over the next couple of years, and perhaps say, "Yes, active ETFs are something I want to have."
Stipp: So, potentially we'll see some change happen there over time because of this big marquee name.
I don't want to get too wonky--and I also don't think we believe there's going to be a big performance difference between the ETF and the mutual fund--but I do want to talk about what some of the differences could be based on what we know. Bill Gross on Bloomberg TV this week said the funds are basically the same. Basically, I think, is the interesting word there. We talked about how they actually will be different in some ways. What are those ways?
Justice: My 5-year-old says cauliflower and broccoli are basically are the same. There are some differences there, right?
So, first of all, you've got derivatives that are held in the mutual fund; you're not really going to see any of those happening in the ETF. There will be some forward contract allowances on very small portions of the portfolio, but for the most part, it's going to actually be the physical holdings, and it's going to have daily disclosure.
Now, the way Bill Gross operates is mainly top-down views that are coming down to influence the portfolio. I don't think [the differences between the ETF and mutual fund] are going to impact performance much. It hasn't for some of the other structures that use physical replication. So, I think that you're going to have very similar performance between any of the share classes, and I would view the ETF almost as a mere share class of Total Return.
Stipp: OK. We have followed the Total Return mutual fund for many years. Eric Jacobson on our fund analyst team, has followed that fund. As an ETF analyst, though, when you folks are looking at the ETF and assessing it, what things are you going to be looking at in the Analyst Report that you write for the fund?
Justice: Some of the things that we're going to be looking for is making sure you're getting similar exposure through the ETF that you would get through the mutual fund, so this is a very similar investor experience.
We're also going to pay much more attention to the efficient market operation of the fund, how well are the market-makers maintaining the bit/ask spreads around the fund--is it a viable option for you, for any dollar amount that you want to put to work?
How is the ETF holding up on an aftertax performance basis, which will certainly be a question. And where are the assets coming from? Are there really channels? I mean, if PIMCO Total Return is basically the biggest mutual fund out there, is the ETF opening up any new channels that weren't available before, because that will be something that will spur development within the industry. Maybe it doesn't matter too much to you and me as end investors, but for the industry, it could have ramifications.
Stipp: Last question for you, somewhat related. Do you think PIMCO is going to be rolling out other strategies in the ETF format?
Justice: I would certainly think so, if they have any success in the launch of this ETF and gathering assets, that's going to be certainly a signal to them that they didn't have the right distribution mechanism, or had at least an incomplete one, in place before, because there are certainly other successful funds, I think, in their commodity lineup, that would certainly resonate getting that out through different channels at an effective price for the retail audience.
Stipp: So obviously a very important ETF to watch for a lot of different reasons. Thanks for joining me with your insights today, Paul.
Justice: Great to be here.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.