Pimco Plans Actively-Managed Bond ETFs

by on July 23, 2009 | ETFs Mentioned:

Pacific Investment Management Co. (Pimco), the world’s largest bond manager, is making a run at the actively-managed ETF business, less than two months after launching its first passively-indexed fund. According to a filing with the SEC, Pimco plans to launch five new actively-managed ETFs, three of which will focus on bonds maturing in less than one year and two of which will invest in municipal bonds. “ETFs are increasingly an important investor tool,” said Don Suskind, Pimco’s head of ETF product development. “By offering active ETFs, we believe there will be a broader set of investors that can access Pimco’s investment expertise.”

A Winnable Uphill Battle

Pimco is a late arrival to the ETF game, as dozens of issuers have rushed into the market over the past few years with hundreds of funds targeting nearly every corner of the investable market. iShares has established itself as the dominant issuer of bond ETFs, introducing and developing several products that dominate their space, including TIP (market cap of $14.4 billion), LQD ($12.5 billion), and AGG ($10.0 billion). Despite the significant first-mover advantage iShares snared, Pimco’s new products could still be very successful, for a number of reasons.

First, the Pimco name, and that of its co-founder Bill Gross, will be standing behind the new products. Pimco is the largest and most-recognized bond manager in the world, and is home to several of the world’s largest mutual , due in large part to their exemplary track record in the space. Gross, who was once dubbed “the nation’s prominent bond investor” by the New York Times. His frequent market commentaries are anxiously awaited and rapidly digested by millions of investors. With no shortage of technical expertise and the presence of a superstar manager, Pimco can make up ground rapidly in the ETF industry, and will likely have investors knocking at the gate, clamoring to get in on the new ETF offerings.

Second, while the ETF industry has become increasingly saturated in recent years, the actively-managed ETF sector is still relatively young. Following the launch of four quasi-active ETFs by PowerShares in April 2008 (PowerShares subsequently launched another fund, PSR, in November 2008), the market saw no action until Grail Advisors made headlines with the launch of its Large Cap Value Fund (GVT) in May of this year. Since Grail’s entrance, a number of ETF issuers have pushed out actively-managed funds, including Claymore. In addition, IndexIQ has blazed a trail into the hedge fund ETF arena, and WisdomTree seems poised to follow. But Pimco would instantly become the market leader in actively-managed bond ETFs

Finally, as I wrote a few weeks ago, PIMCO’s first ETF offering has been well-received by the market, quickly establishing sufficient liquidity and increasing its asset size as new investors have lined up. While TUZ still pales in comparison to its iShares rival (1-3 Year Treasury Bond Fund – SHY), Pimco is obviously encouraged by the success of its maiden voyage into the ETF arena.

In short, Pimco has a tough battle ahead, trying to break into the ETF market this far along into the game. But it also has a number of factors acting in its favor, and I fully expect the firm to establish itself as the leader in its niche space. The actual launch of Pimco’s actively-managed ETFs are still months away (assuming that they do indeed reach the market at some point), so there will be much more to this story – stay tuned.

Disclosure: No positions at time of writing.