Pacific Investment Management Co. plans to offer an exchange-traded fund that will invest primarily in fixed-income securities, its first to be managed by Bill Gross.
Pimco Total Return Exchange-Traded Fund will buy a combination of U.S. and non-U.S. public and corporate debt, the Newport Beach, California-based firm said in filing today with the U.S. Securities and Exchange Commission. The fund may hold as much as 10 percent of its assets in high-yield securities. It won’t invest in options, futures or swaps.
Under Chief Executive Officer Mohamed El-Erian, Pimco has been diversifying beyond bond mutual funds. Two years ago, Pimco started pushing into exchange-traded funds, some of which are actively managed rather than tracking an index. Gross is best known for running the $236 billion Pimco Total Return Fund, the world’s biggest mutual fund.
“This is a game changer,” Scott Burns, head of ETF research at Morningstar Inc. in Chicago, said in an interview. “This is the kind of validation that the active ETF industry was looking for.”
Gross uses a combination of derivatives such as options, futures and swap agreements in the Total Return Fund, which has advanced 8.7 percent annually in the past five years to beat 99 percent of peers, according to data compiled by Bloomberg.
The Total Return ETF cannot invest in such securities. The SEC said in March 2010 it wouldn’t approve new ETFs that make significant use of derivatives, pending a review of the practice that is still ongoing. Should the SEC lift the freeze, the Total Return ETF would invest in derivatives, according to today’s filing.
Mark Porterfield, a spokesman for Pimco, declined to comment.
Since Pimco began its push in 2009, Pimco has gathered about $2.9 billion into 13 ETFs, according to data from State Street Corp. in Boston. Excluding the ETF that will be managed by Gross, four of Pimco’s ETFs are actively managed.
Actively managed ETFs seek to combine the skill of a manager selecting investments with the trading flexibility, lower fees and tax advantages of ETFs, which typically track an index. ETFs are required to disclose all or most of their holdings daily. That transparency has discouraged most mutual- fund managers from opening ETF versions of their actively managed products. Mutual-fund managers are required to reveal their holdings quarterly after a 30-day lag.
Actively run funds account for $4.2 billion of the $1.07 trillion in ETF assets in the U.S., according to Morningstar.
So far, actively managed ETFs, like others already run by Pimco, have focused on highly liquid markets, such as Treasuries, where other investors mimicking the trades are unlikely to affect prices. Fixed-income investments are also more difficult to copy because transactions don’t occur on an open exchange.
“Bonds are less of an issue than equities, but it puts another nail in the coffin of the idea that active management has to be protected from daily disclosure,” Dave Nadig, director of research at Index Universe, a San Francisco-based financial research company.
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