Why PIMCO’s Move Will Lead To More Actively Traded ETFs

PIMCO Funds is a trailblazer. While the launch of the PIMCO Total Return ETF sparked media attention, TRXT is not the first actively managed ETF launched by PIMCO. In fact, there are four others. The largest being the Enhanced Short Maturity Strategy Fund (MINT). With $1.4 billion in assets, MINT is the largest actively managed ETF in the world.

ETFs have traditionally been passive investment products. Put simply, investment choices are made according to pre-determined rules with minimal human discretion involved. Most ETFs are designed to mirror or trade the performance a particular market index or commodity price. Actively managed ETFs try to do better than a benchmark index, like the S&P 500 for example.

Up until now, actively traded ETFs have not gained much traction. The total amount of money invested in ETFs/ETNs in the United States is around $1.2 Trillion, and growing every month. At the beginning of 2012, there were only 39 actively managed ETFs with $5 billion in assets. Active ETFs represented less than a half a percent of the market.

Why have active ETFs not taken off?

There are a variety of reasons:

  • Historical – ETFs were invented to give investors an inexpensive avenue to get exposure to “beta” aka market performance. The companies that launched them were not money well-known money managers. There were companies that specialized in indexes.
  • Fear – Large Money Managers that have the expertise to launch them have been afraid to offer their products in this manner because, it could potentially upset their primary distribution network financial advisors.
  • Lack of Demand – Investors have not be clamoring for actively traded ETFs. They want great investment products. So far investors have found the selection of actively traded ETFs  small and not very attractive.

The launch of the PIMCO TRXT ETF changes everything. PIMCO, a major mutual fund company has broken the ice with it flagship fund. With PIMCO going first, other mutual fund companies like Fidelity and Janus need to be less worried about a backlash from the financial advisors that sell their mutual funds. Furthermore, investors will start asking if there is an ETF version of popular mutual fund products. (ETFs are viewed as less expensive than mutual funds. Cost conscious investors will try to see if they can save money by investing in an ETF instead of a mutual fund.) As a result, launching actively traded ETFs will now be viewed as a response to market demand instead of a move against financial advisors.

BOLD PREDICTION: In the next 2 years, there will be $200 Billion invested in actively managed ETFs.

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