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How PIMCO Could Shake Up the ETF World

Scott Burns

Scott Burns: Hello there. I'm Scott Burns, director of ETF analysis at Morningstar. Recently, PIMCO threw its hat into the ring in the ETF space, launching an indexed ETF that tracks the 1-3 year treasury market.

Now, while the product itself is actually pretty good in terms of its lowest cost offering out there, and you do have the benefit of PIMCO's trading operations behind it to help keep hidden costs down as they rebalance the index, what we really want to see is whether or not PIMCO will actually make the move to tip its active bond management into the ETF structure.

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What would this mean for the ETF market? Well, one thing, we think of a behemoth like PIMCO, with its world-renowned manager Bill Gross - who my boss, Don Phillips, recently referred to as the individual who has probably made more money for investors in the last 20 years, or is at least in the top three.

What would having that kind of quality active management in the ETF wrapper do to the industry? Well, a few things. One, investors clearly want the tax efficiency of an ETF and the liquidity of the ETF, but at the same time there are a lot of folks who want to find quality managers and be able to do that.

If PIMCO could bring that quality active management and deliver it in the ETF wrapper, we could see a real sea change in how ETFs are viewed in the money management industry.

Will active management become indifferent as to whether it was a mutual fund or an ETF, and just as passive as current indexing is? Because ETFs are not the only representations of passive management; there are a lot of index open-end funds out there.

So as much as we're happy to see PIMCO come out with such a low-cost product, as it did with its initial foray into the ETF space, what we'd really like to see is them bring their active management to bear.

Thanks. I'm Scott Burns with Morningstar. For this and other information, please check out Morningstar's ETF Center on Morningstar.com., and our Morningstar ETF Investor newsletter.

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