by Robert Goldsborough
This week, PIMCO submitted a filing with the Securities and Exchange Commission seeking permission to roll out a similar version of its popular PIMCO Total Return Retail (PTRRX) mutual fund in an exchange-traded fund wrapper.
PIMCO, which has been building out a footprint in the ETF space over the past several years, is proposing the actively managed PIMCO Total Return Exchange-Traded Fund (TRXT), which would disclose portfolio holdings daily.
Morningstar long has called for PIMCO and its guru Bill Gross - who has managed PTRRX since inception and who, along with his team, received Morningstar's Fixed-Income Manager of the Year honors in 1998, 2000, and 2007 - to create an ETF version of the massive PIMCO Total Return. Our argument long has been that disclosing portfolio holdings daily - a hangup for some traditional mutual fund managers who want to roll out actively managed ETFs - wouldn't be much of a hindrance. After all, PIMCO is so big that many trading desks have decent ideas already about when the firm is buying and selling. Plus, we have advocated for an actively managed ETF version of PTRRX under the argument that the fees for retail investors could be lower, the tax efficiency could be higher, and the fund distribution channel is open to all.
In today's filing, PIMCO does not disclose an expense ratio for the proposed ETF. However, the filing does alert investors to the fact that the proposed ETF's investments and results "are not expected to be the same as those made by other funds for which PIMCO acts as an investment adviser, including funds with names, investment objectives and policies similar to" the proposed ETF. Put another way, PIMCO is telling investors that the proposed ETF may be managed differently or trade after the mutual fund makes its trades. As a result, those investors who want to jump ship from PTRRX in search of a possibly lower fee from the ETF version may see different results. This ETF is not a separate share class of the existing mutual fund with a similar name.
Other than that, we are struck by the fact that today's filing casts a broad net, giving the proposed fund permission to own many different kinds of fixed-income securities. Like the mutual fund, the proposed ETF would invest primarily in investment-grade debt securities, with as much as 10% invested in high-yield securities and as much as 30% of its assets in foreign-denominated bonds. The fund also would be permitted to invest as much as 10% of its assets in other affiliated and unaffiliated funds, like open-end or closed-end management investment companies, including other ETFs.
As we have noted in the past, Gross and his team have been frustrated by how low Treasury yields are, and he believes that the Fed's plan to stop buying bonds in June may well cause yields to rise. As such, Gross and his team have been focusing instead on corporate bonds, high-grade non-U.S. debt, emerging-markets debt, and municipal bonds, all of which they believe represent less risk than holding expensive and interest-rate-sensitive Treasuries. It's a dramatic deviation from his benchmark but one that investors should feel confident in, given Gross' impressive track record. We would expect his team to apply that same thought process to this proposed ETF.
Although no expense ratio yet has been disclosed, we believe that an ETF version of PIMCO Total Return would be a winner for investors, with a lower fee than the retail mutual fund.