Vanguard displaced iShares from the top spot which it occupied in 2009, while State Street maintained its 3^rd place ranking. However, the surprise entrant was PIMCO, given that it is a relatively new player in the ETF space and had only $1.4 billion in assets at the end of August. PIMCO’s actively-managed ETFs held about 41% of those assets in 3 different Active ETFs, the largest one of which was the Enhanced Short Maturity Fund (MINT: 100.78 0.00%), holding $517 million in assets. PIMCO was not in the rankings at all in 2009, which makes its fourth ranking all the more impressive.

The report is based on a survey of 1,560 investment advisors from which Cogent Research calculates a standardized loyalty metric called a Net Promoter® Score (NPS^SM), based on which the ranking is established. Advisor loyalty is measured on metrics such as market penetration, level of commitment and share of wallet.

PIMCO’s ranking amongst the ETF providers underscores the power behind its brand name. PIMCO, like Vanguard, has a huge reputation in the fund industry especially because of its prowess in the fixed-income market. And that appears to have carried over into the ETF marketplace as PIMCO’s new ETF offerings, both passive and active, gain traction. This is definitely encouraging for other large mutual fund players who in recent months have also filed with SEC to launch various actively-managed ETFs. These include the likes of Legg Mason, Eaton Vance, John C. Hancock and T. Rowe Price – all of whom garner a lot of respect in the mutual fund world, and given PIMCO’s successful transition into ETFs, can also count on their strong brands in giving them a head start.
 
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The Short Term Municipal Bond Fund has gradually gained some traction with investors over the months, with its asset based increasing from just $8 million back in March, to about $13 million at the end of May, ramping up to the $18 million mark at the end of July. The fund should attract investors in higher tax brackets who are looking for tax-exempt sources of return. The municipal bond market though is by no means a sure bet, with many issuers and municipalities under severe budgetary pressures which can affect their ability to fulfill their obligations significantly. As such, SMMU provides investors who are looking for exposure to the municipal bond market, with access to PIMCO’s established management expertise in the fixed-income space. Unlike index funds which rely solely on rating agencies for credit analysis, the fund utilizes issuer-specific credit analysis from PIMCO. The fund charges investors an expense ratio of 0.35%, which is much lower than comparable mutual fund offerings.

Investment Mandate

The Short Term Municipal Bond Fund seeks attractive tax-exempt income while preserving capital by investing at least 80% of its assets into municipal bonds whose interest payments are exempt from federal income tax. The fund invests only in securities that are not subject to the federal alternative minimum tax (ie. AMT-free securities). The duration of the portfolio is expected to be less than 3 years and consist primarily of short duration, high quality bonds. The fund managers also do not utilize any derivatives to implement the investment strategies. The portfolio managers also look to manage capital gains and losses in order to minimize taxes on capital gains and harvesting losses.

Portfolio Composition

SMMU consisted of 69 individual securities as of August 28^th, whose average effective maturity was about 2.5 years. 71% of the fund was invested in securities with maturities between 1 and 3 years, with none of the securities exceeding 10 years in maturity. The fund’s composition does not differ much from its benchmark, the Barclays Capital 1-3 Year Municipal Bond Index. In terms of maturity buckets, where the index does not hold any securities exceeding 5 years in maturity, SMMU invested 5% of the funds in the 5-10 year maturity bucket. As a result, the average maturity of the fund is slightly higher that of the index.

Performance

Given that the fund has only been in existence for about 7 months, it would be unfair to judge the active manager’s performance on that time period. However, looking at the numbers can shed light on the fund’s track record so far. Since inception, SMMU has returned 1.40% till the end of July while the fund’s benchmark, the Barclays Capital 1-3 Year Municipal Bond Index, has returned 1.60% over the same period. That implies an underperformance of 0.20%. The returns of the fund after taxes would have been even lower, standing at 1.18%. The chart below compares the fund’s price performance to that of two comparable index ETFs – the iShares S&P Short-Term National AMT-Free Municipal Bond (SUB) and the SPDR Nuveen Barclays Capital Short-Term Municipal Bond (SHM):

The fund performed quite well in July, as the municipal bond market gained from an increase in investor’s risk appetite. With many states, such as California and New York, and municipalities failing to balance their budgets, credit selection remained important – as pointed out by PIMCO’s monthly commentaries. However, because supply and new issues in the municipal bond market have been limited, money is continuing to flow into this segment of the fixed-income market.

Premium/Discount History

Looking at the premium/discount history for Q2 2010, SMMU has a relatively clean record and has been able to keep the disparity between the ETF price and the fund’s NAV in a tight band. The fund was able to keep the premium/discount to within +/- 50bps on each of the 63 trading days in the quarter, though more time was spent by the fund trading at a discount than at a premium. That should give investors some confidence that they are not trading very far off the fund’s true value when investing or selling SMMU.
 
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However, the advantage cited there is that mutual fund investors get the exact NAV of the fund as opposed to ETF investors making the transaction at an “indicative price” that could be at a premium or discount to the actual fund’s NAV. In general, ETF shares will trade at a premium to NAV when demand is high and at a discount to NAV when demand is low. There is a mechanism that exists which is intended to keep the ETF’s price close to NAV. The designated broker to the fund has the ability to arbitrage between ETF price and the fund NAV and creating a profit for themselves. They do this by creating or redeeming ETF shares from the fund company, in exchange for the underlying basket of securities that the broker can buy from or sell to the open market. However, the broker would only do this if the discrepancy between the ETF price and fund NAV is large enough to compensate them for the transaction charge they pay the fund company when creating or redeeming ETF shares. As a result, in every ETF, a small premium or discount to the fund NAV will always exist because the designated broker does not have enough incentive to arbitrage that away. But how small is small?

When looking at actively-managed ETFs specifically, there have been claims made that Active ETFs will tend to have larger premium/discounts to NAV because of greater turnover in the fund and lower interest from market makers and designated brokers etc. We decided to look at exactly how Active ETFs in the US have fared in terms of keeping their ETF prices close to NAV. The table below looks at the number of days in Q2 2010 (63 trading days) that each Active ETF spent trading premiums or discounts of different magnitudes. And the chart below that shows the average distribution across all 26 actively-managed ETFs that traded in Q2 2010. The information is compiled from data disclosed on each fund’s websites. The premium/discount is calculated as the % deviation of the ETF’s mid price on market close from the fund NAV.

From the table, we can see that most equity focused actively-manged ETFs have not had trouble keeping their ETF prices close to NAV, except maybe AdvisorShares Dent Tactical ETF (DENT: 19.5501 0.00%), that has spent more days trading at large premiums or discounts compared to other equity ETFs. On the fixed-income side, Grail’s two bond funds have had a tendency to trade at a discount of bewteen 50-99 bps quite a lot. This doesn’t compare well with PIMCO’s bond ETFs that have what you could call a “perfect score” in this context, as none of their funds traded at premiums or discounts greater than 50 bps in Q2. However, the largest discrepancies are seen from WisdomTree’s currency funds that trade outside of the 50 bps mark with surprising regularity. The most glaring offender would be the Brazilian Real Fund (BZF: 28.21 0.00%) which spent only 35 trading days trading within the tight 50 bps band, and had 8 days where it traded at a discount greater than 100 bps. Clearly, this is something WisdomTree should be looking at.

On average though, looking at Active ETFs as a whole, 87% of the time the funds traded within the +/- 50 bps range, with very few occurences overall where funds traded at large premiums or discounts in exccess of 2% or 200 bps. This is isn’t much different from most traditional index ETFs. As such, Active ETF investors don’t need to be overly concerned. It is more important to know in which asset classes you are more likely to encounter larger premiums and discounts than normal and keep a look out for those before investing.
 
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While WisdomTree’s currency ETFs have been successful at gathering the lion’s share of assets in the Active ETF space, their actively-managed ETFs are essentially seen by many investors as money-market funds. Active fixed-income ETFs had 23% of assets at the end of July, while equity focused active ETFs had a measly 5% share, even though that category is made up 11 different ETFs. Cumulatively, these active equity ETFs held just in excess of $100million in assets. So what exactly has been behind the success of fixed-income focused actively-managed ETFs relative to equity focused products?

Effectiveness of active management in fixed-income securities

The first idea that can explain the relative difference in success rate is that, traditionally, active management is seen to be more effective within the fixed-income market, as opposed to equities. There are more inefficiencies in the bond market for active managers to exploit than in the stock markets, with liquidity differences being one of the factors that brings about exploitable inefficiencies. As such, fixed-income managers are able to add alpha over their benchmarks more often than not, whereas within equities, active managers have a much harder time outperforming indices. This has been reflected in the success that PIMCO’s 3 actively-managed bond ETFs have seen, with one being a money-market alternative and the other two funds focusing on the municipal bond market. These funds have been relatively more popular because of the access they provide to PIMCO’s active management expertise in the bond market. And have these fund actually been successful at outperforming? Of the 3 funds, only PIMCO’s Enhanced Short Maturity Fund (MINT: 100.78 0.00%) has been able to beat its benchmark, while the other two municipal bond funds have lagged their benchmarks marginally, since inception.

Less impact of daily disclosure requirement in fixed-income than equities

The second big factor is the effect of the daily disclosure that is required by actively-managed ETFs of all holdings. Most active managers, especially equity managers, have been reluctant to meet this stringent requirement because they fear exposing their alpha generating strategies to competitors. In a recent interview with ActiveETFs | InFocus, Patrick Daugherty, who worked behind the scenes on the launch of the first actively-managed bond ETF from Bear Stearns in 2008, shared his thoughts on the effect of the daily disclosure requirement on active managers. He said, “There’s no doubt it discourages some of them because sophisticated and active traders whom I speak to, who have been known to do other things that require capital and human resources, have told me that this is the reason they have not gone into this field”. If any equity manager wants to build up a position and exit a position over several trading days, then that move would be visible to outsiders through the daily disclosure of holdings. As a result traders could potentially monitor the positions being changed and front-run the moves made by the active manager, resulting in sub-par pricing for the fund. The bond market though has a lot more depth compared to equity markets. For example, the municipal bond market comprises of tens of thousands of different issues which means that holdings in different funds can vary extensively. As a result, knowing what bonds a fund holds may be very helpful for an outside trader. Due to this, managers behind and investors in fixed-income funds have been far more comfortable with the disclosure requirements of Active ETFs.

Presence of reputed managers in fixed-income, not in equities

The third and probably most important factor has been the lack of star managers running Active ETFs within the equity space. As most investors would tell you, when it comes to active management, the biggest pull factor is nearly always the reputation of the managers behind the fund and their track record. The fixed-income space has seen several strong and well-reputed managers get behind actively-managed ETFs. One example is, of course, PIMCO which has attracted a lot of assets into its Active ETFs by virtue of its reputation in the bond market, as mentioned earlier. Grail Advisors also recently announced a partnership with DoubleLine, run by the renowned fixed-income manager, Jeffery Gundlach. In the equity landscape though, there has been nothing comparable to attract investors to actively-managed equity ETFs. The industry is still waiting for a Bill Miller, or an equivalent, to get interested in the Active ETF space.
 
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PIMCO’s Enhanced Short Maturity Fund (MINT) was launched in November 2009 and was the first actively-managed money-market ETF that strived to achieve returns on cash holdings better than the measly rates available in basic US treasuries. It served as an alternative to money-market funds for investors and portfolio managers looking to invest excess cash in portfolios. Given PIMCO’s well known fixed-income expertise and the ease of access provided through the active ETF structure, MINT proved to quite a success. The fund gathered close to $600 million in assets in the month of May alone and became the largest actively-managed ETF in the US. May was an especially volatile month for the equity markets as the S&P500 went from 1200 to 1070 and that was reflected in the scramble to move allocations to cash and money-market instruments like MINT.  At its peak, MINT’s market cap exceeded $800 million.

However, since then, as the markets bottomed in June started recovering in July, MINT started seeing massive outflows, presumably because investors moved allocations back into risky assets. Assets dropped to $650 million at the end of June and really fell in July, plummeting to about $330 million, easily making it the biggest loser in the Active ETF space. As we highlighted in June, MINT’s fortunes are likely to continue being dependent and inversely related to the fortunes of the general market. By virtue of its asset class, MINT’s asset base will be volatile, but it’s important to note that assets have not fallen back to the sub-$200 million level that MINT was at prior to its steep growth in May. And most significantly, MINT has been quite successful at its main objective, to provide total income and return than money-market funds. The chart below shows MINT’s healthy outperformance when compared to the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL), especially so in recent months.

In contrast to the MINT’s story, another brand new actively-managed ETF, the Mars Hill Global Relative Value ETF (GRV) saw nearly instant success in July. GRV was AdvisorShares’ second product launch that hit the market on July 9^th, with the Dent Tactical ETF (DENT: 19.5501 0.00%) being the only previous offering from AdvisorShares.

GRV hit the road running, gathering $38 million in assets in less than 3 weeks. While in the wider universe of ETF launches, that may not mean much, within the Active ETF space, that was enough to make it the largest equity actively-managed ETF in the US. While that may say more about the lack of success of other equity active ETFs than about GRV itself, it does indicate that investors like what GRV has to offer. The fund is unique in that it is the first actively-managed ETF to offer a long/short investment strategy that is usually accessible only through hedge funds. The portfolio managers will generally pursue a market neutral strategy but can opt to utilize derivatives to obtain a directional exposure to the market.

Initial reactions to GRV’s launch were mixed with some commentators questioning the complexity of the product and its utility for investors over long-only strategies. However, investors do seem to be voting with their money as the strategy clearly does appeal to some investors. The coming months will show whether the interest in GRV and assets continue flowing in. And of course, there’s the important matter of actually being able to provide the absolute returns that the sub-advisors claim to strive for.
 
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Passive indexing appeals to many because of its simplicity and straight-forward approach to investing of holding all the securities in index. Simplicity sounds very good in theory but in reality, it’s not the best recommendation in certain situations, as Roger illustrates. Most passively-managed financial sector ETFs would hold all the big names like JP Morgan, Bank of America, Citigroup and other big global banks, just because they are obligated to track the indices. The indices in turn include all those securities as components in order to meet their objective of being a good representation of the sector. Looking at that carefully, you’ll notice that neither the objective for the index (to be a good representation of the sector) nor that for the passive ETF (to track the index closely) has anything to do with picking the “right” investments for investors. And therein lies the issue when it comes to investing passively in sectors that represent minefields more than they represent investment opportunities. And this is especially true when you hold index ETFs that are cap-weighted. For example, if you invested passively in the financial sector using the Financial Select Sector SPDR Fund (XLF) on July 21^st, you’d end up holding more of Citigroup (5.69%) than of Goldman Sachs (4.84%). Anyone who has followed the markets in the last 2 years would never in their right mind make such an allocation, given the market dominance of Goldman Sachs and the severe ongoing troubles of Citigroup. An active manager operating an actively-managed financial sector ETF would be able to make those choices instead of being forced to provide the investor with market cap weights of each security in the sector.

Of course, one actively-managed ETF for the financial sector already exists – in the form of Grail Advisors’ RP Financials ETF (RFF: 24.56 0.00%), which was launched in October, 2009. According to numbers from Google Finance, RFF has been able to outperform the Financial Select Sector SPDR (XLF) by about 100 basis points since inception. And looking at the holdings, where in XLF, 5.69% of your money would have been in Citigroup, RFF does not even hold Citigroup in the portfolio. Which specific active manager you end up choosing is, of course, another debate all together. RFF, for instance, is still very light on assets, has a short track record and little investor recognition.

To further the original point though, some of the most successful actively-managed ETFs provide investors with exactly the value-add highlighted above – the ability to utilize the expertise of an active manager in a sector where it would be most useful in avoiding pitfalls. For example, PIMCO’s Enhanced Short Maturity Fund (MINT: 100.78 0.00%), which is the 2^nd largest fund in the Active ETF space, operates in the short-end of the yield curve, providing cash management solutions through investments in money-market instruments. Dislocations in the cash market through the credit crisis have made investing in money-market securities less reliable, thus making an actively-managed money-market fund more suitable than a fund tracking a passive money-market index. Another instance where Active ETFs are more relevant is the municipal bond market. In a time when huge budget deficits are the norm across US states and cities and states have even issued IOUs, the credit quality of the issuer becomes a key factor when investing in municipal bonds. A credit manager who has the ability to distinguish the nearly bankrupt municipalities from those with strong balance sheets would again definitely add value over a passive municipal bond index.

To sport some other ideas on areas where active management could come in handy – emerging market equity, emerging market bonds, high yield bonds and maybe even real estate could be areas where holding a representative index of the sector might not be the best idea.
 
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MUNI has gained traction and assets slowly and steadily since March, 2010 when it had $23 million in assets to about $43 million now. The strategy should appeal to investors in higher tax brackets that can take advantage of the tax-exempt income available from municipal bonds. The main value proposition for the actively-managed ETF is ability to avoid owning bonds of issuers that managers feel have poor credit characteristics, especially in an environment where many US municipalities are stretched financially. The ETF has not been as quick to grow as PIMCO’s money-market offering, the Enhanced Short Maturity Fund (MINT: 100.78 0.00%) and many industry watchers are looking to MUNI for confirmation that PIMCO’s success was not one-off with MINT.

Investment Mandate

MUNI invests at least 80% of its assets (under normal conditions) in intermediate duration, high quality municipal bonds which provide interest income that is free from federal and sometimes state tax. Research is done on the credit quality of the issuing municipalities with an effort to avoid weak issuers, while maintaining the average duration of the portfolio between 3-8 years. Importantly, the portfolio invests only in AMT-free bonds and avoids futures, options or swaps. The ETF has net annual expenses of 0.35% and is benchmarked against the Barclays Capital 1-15 Year Municipal Bond Index.

Portfolio Composition

The portfolio composition of MUNI differs quite a bit from its benchmark which, of course, is how the managers try to outperform their index. The big differences lie in the fund’s maturity distribution, which is presumably where the managers are looking get their outperformance from. Where the Barclays Capital 1-15 Municipal Bond Index is quite evenly spread out across maturities between 1-20 years, MUNI currently concentrates 77% of its holdings within the 5-10 year maturity range and hence has much lower proportions in other maturity buckets. The 5-10 year maturity bucket for municipal bonds likely provides better liquidity in securities that the managers can take advantage of. Despite the higher concentration in a lower maturity bucket, MUNI’s overall average maturity is shorter than that for the index because the fund has a much lower concentration in the 10-20 year bucket versus the index.

Performance

Looking at the performance of the fund relative to its index though, MUNI has not performed all that well. In every time period, except the last 1-mth, the fund performance has lagged behind the benchmark. For example, since inception, the fund has underperformed the index by 42 bps, with NAV returns of the fund being 2.18% while the index returned 2.60%.

To provide a visual comparison, the performance of MUNI is compared to the iShares S&P National Municipal Bond Index Fund (MUB) below:

To understand why MUNI may be underperforming, it’s helpful to read the monthly manager commentaries that describe market conditions. The municipal bond market did see overall strong performance in the month of May alongside a flight to quality resulting from the debt crisis in Europe. Another factor has been continued concerns over budget deficits across states and municipalities in the US that have been aggravated due to April tax receipts being lower than expected.

Premium/Discount History

As with any ETF, it’s important to look at how closely the ETF’s share price has been tracking the fund NAV because large deviations from NAV may mean investors may be getting a raw deal when they get in and out of the fund. In that regards, MUNI has done a good job of keeping deviations to a minimum, with no instances in Q1, 2010 where the ETF price deviated from the fund NAV by more than 50 bps.
 
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Money-Market Alternative?

If you look at the make up of MINT in its IN FOCUS coverage, you’ll see it is essentially a money-market alternative for investors who are looking to stash away their excess cash and who do not want to subject their money to the miniscule return offered by treasuries and money-market funds. With an effective holdings maturity of just 0.84 years, the liquidity in the portfolio is likely very high. And this notion of being a money-market alternative is supported by how the assets managed have varied with respect to the market performance. Looking at the table below, you can see the trends in AUM versus the market performance since March.

In the month of March and April, when the S&P500 was on a rampage, the assets managed by MINT peaked out at the end of March and actually decreased in the month of April, as the market itself peaked out. This is generally in line with contrarian expectations which would point towards the lowest cash allocations in portfolios just when the market is peaking, as everyone tries to chase the bull. And then came May, when the S&P500 fell by more than 8% and investors fled to the safety of the US$ and non-risky assets. That set the stage for MINT’s explosive growth as investors looked for places to park their cash, while not willing to settle for traditional money-market returns. In that sort of a scenario, any vehicle that purports to seek greater returns than money-market funds while still providing ample liquidity, will seem quite attractive – and that’s exactly what MINT does.

Just Hope or Real Outperformance?

Given what the Enhanced Short Maturity ETF promises, the next question naturally is, has it delivered? Is all this money flowing into the fund just in hope of better performance than what any money-market fund could give them or are they seeing some real outperformance?

The MINT portfolio is managed by Jerome Schneider, an EVP at PIMCO’s Newport Beach office who joined PIMCO in 2008. As of writing, the fund had 473 holdings and invested only in investment grade securities while staying away from derivatives usage. A large portion of those holdings are invested in investment grade credit as well as government securities. The fund is benchmarked against the Citigroup 3-month Treasury Bill Index. From performance numbers on the fund’s website, MINT has outperformed the index by 38 bps year-to-date. If you were invested in the index, you would have earned a measly 2 bps while an investment in MINT would have returned you 41 bps. To put this visually, I charted the MINT price performance against a comparable index – the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL), and the outperformance is quite clear. So, the investors putting their faith in MINT are not being taken for a ride.

Will Assets Track Market Sentiment?

Granted that PIMCO is doing a good job of delivering on its investment objective, but given how the assets under MINT have fluctuated inversely with the market, it begs the question – is MINT’s attractiveness to investors destined to be linked with market sentiment? In other words, will assets managed by MINT drop back to previous levels once we see the next upward bounce in the market and investors dive right back into making riskier bets?

The answer to that question will not be obvious until we’ve gone through a few such cycles. There is little doubt that in large part, the investor interest in MINT will depend a lot on their interest in holding cash. The outperformance will no doubt impress investors while they are in it, but when markets get on a role again, there are very few investors that will settle for a 41 bps return. By virtue of the asset class that MINT operates in, it will be hard for it to maintain its appeal to investors continuously. But then again, no asset class or investment category holds the top seat through every market cycle, and PIMCO’s MINT shouldn’t pin its hopes on doing so either.
 
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Click here to listen to the full audio interview. Alternatively, find the transcript of the interview below.

Shishir Nigam – ActiveETFs | InFocus: Tell us a little about yourself and how PIMCO decided to step into Active ETFs?

Don Suskind – Head of ETF Product Management, PIMCO: Thanks Shishir, appreciate you taking the time to talk with me today. Briefly about myself, I’ve been with PIMCO for about 6 years and before working on our ETF effort, I was involved in our StocksPLUS product which is also an equity product. And then I got more involved in our ETF business several years ago. To your question about how did PIMCO decide to step into Active ETFs, it was pretty natural for us, because PIMCO has historically been an active investment manager, and investors access our various active strategies through a range of different vehicle types including separate accounts, mutual funds, closed-end funds, private funds, other vehicles and now through ETFs also. And so when active management became possible in the ETF vehicle in early 2008, that’s when we took a closer look at the features of the ETF and determined that the ETF vehicle contains enduring value propositions compared to mutual funds – such as access to investment managers who may have only been accessible by institutions in the past. Anyone who can buy stocks can buy ETFs and access any manager that puts their strategy in an ETF, portfolio transparency is certainly different in ETFs compared to mutual funds, they have a more equitable tax allocation and many investors may appreciate the ability to trade ETFs throughout the day as well.

Shishir: PIMCO’s products had roughly 62% of all assets managed in the US Active ETF space, at the end of March. What do you think has attracted investors to PIMCO’s products?

Don: I think it’s a combination of a couple of things. First of all, many people already believe in PIMCO’s capabilities as an active manager. So that belief really helps people get comfortable with the idea of how we could actively manage portfolios in the areas that we’re offering Active ETFs right now. That leads to the second point, which is that the categories in which we’ve offered Active ETFs – municipal bonds (NYSE: MUNI and SMMU) and alternatives to money market funds (NYSE: MINT) – are categories that are in high demand. Specifically, cash allocations remain very high, and people are looking for ways to increase their return on cash but they may not yet have the conviction to move all the way back into risk markets. People know that their money market yields are barely above zero and so any way to enhance that return potential is certainly of interest. And we see a lot people moving out of money markets into strategies that can generate a slightly higher yield, but they aren’t necessarily moving  back into higher volatility beta exposures.

Shishir: In early March, Eaton Vance filed to launch 5 Active Bond ETFs with strategies and even names identical to PIMCO’s existing products. How is PIMCO planning to deal with more competition with other large players like Legg Masson also entering the space?

Don: We welcome additional entrants and additional competition and we stand ready to compete on the basis of PIMCO’s investment management process, our portfolio management skills and ultimately on performance. And so the more attention that’s drawn to this category, we’d certainly welcome that.

Shishir: For the Active ETFs as a whole, what do you see being some of the main challenges that the space faces?

Don: I think it’s different for different managers. I mentioned that one of the main reasons that PIMCO has gotten traction is that people believe in PIMCO’s capabilities as an active manager. For a manager that does not have a track record in other strategies or doesn’t have the brand recognition, it might be difficult to get momentum until they’ve established a track record in that particular strategy.

Shishir: Will we be seeing a Total Return Active ETF from Bill Gross anytime soon?

Don: Well, to that question, my normal answer is “never say never”. Although, with any product that we put out, we begin and end our product development with the investor experience in mind. And we need to ask what vehicle makes sense for which strategies and which strategies can we put in different vehicles. For many of our actively managed strategies that we have in mutual funds, the ability to generate the returns that investors have come to expect in those types of funds in part relies on being able to move portfolio positions anonymously– the disclosure required by active ETFs may detract from the fund’s ability to generate returns for investors. A different way to say that is that investors in something like the Total Return Fund, for example, may not actually want the portfolio to be disclosed every day because there is risk that that could detract from the return potential of the fund.

Shishir: Given that for each PIMCO Active ETF out on the market, PIMCO has a comparative mutual funds strategy as well, do PIMCO’s Active ETFs result in cannibalization of fund flows from PIMCO’s mutual funds?

Don: If you look at the funds that we offer in ETFs, at the moment we don’t offer any directly comparable mutual fund strategies also. So the guidelines that are drawn up for our ETFs have some very specific differences between what we offer in an ETF vehicle and what we offer in a mutual fund vehicle.  To the extent that we may offer similar strategies in a mutual fund and ETF at some point in the future, if we were to do that, I think that the products could be designed in such a way that we wouldn’t expect cannibalization or that we’d be indifferent to whichever choice an investor preferred. And ultimately, we do have a number of strategies now that are offered in multiple vehicles, some of the strategies we offer in mutual funds we also offer in separate accounts or in private funds in some instances. So the intention of a different vehicle from our perspective is to create access for different categories of investors. It’s not necessarily for one vehicle to take over another, it’s just to create access for investors that may have a preference for that vehicle.

Shishir: So far most of the Active ETFs have been in the North American market. Do you see there being scope for Actively-Managed ETFs in Asia?

Don: I think so. Investors based in Asia have many of the same challenges that investors in the US have, especially in the area of cash management. And so to the extent that an ETF provides access to investment management expertise that otherwise is not as readily available, an actively-managed ETF could certainly have appeal to investors based in Asia.

Shishir: Do you see market liquidity or regulatory concerns being a bigger hurdle in the Asian markets?

Don: I wouldn’t say I’m an expert in that category. I think you do have many Asian investors that buy US-listed ETFs directly on US exchanges. So that doesn’t appear to be a hindrance. As far as the other regulatory filters or hurdles, I don’t really have a view for you on that at this point.

Shishir: That’s great Don. Thanks a lot for joining us and we wish you all the best for the future.

Don: Thank you so much.

Disclosure: No positions in above-mentioned names.

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Michael Johnston of ETFdb, provides a good summary of the different index ETFs that are available to investors looking to park their cash somewhere for a short period of time. There are also a couple of options available to investors in the actively-managed ETFs arena. Active ETFs allow investment managers to use active management to beat their traditional index benchmarks, while at the same time preserving the advantage and benefits of the ETF structure. The two Active ETFs listed below have lower expenses than short-term money market mutual funds but provide the same type of active management to investors in a more accessible, tradable and transparent ETF structure.

1. PowerShares Active Low Duration Fund (PLK: 25.53 0.00%)

PLK seeks to provide alpha over the Barclay’s Capital 1–3 Year U.S. Treasury Index. Their strategy involves managing portfolio construction and security selection according to market conditions, macro-economic and sector level factors as well as issue specific factors. PLK is expected to have a normal effective duration between 0-3 years and carries an expense ratio of 0.30%. PLK has provided an alpha of about 2.5% over the index since inception, as seen below. However, the liquidity of the ETF is an issue due to low traded volumes and a high bid-ask spread. Find a complete breakdown of PLK here.

2. PIMCO Enhanced Short Maturity Strategy Fund (MINT: 100.78 0.00%)

MINT invests at least 65% of its assets in short duration, investment grade debt and the average duration of the portfolio will not exceed 1 year. This ETF provides access to PIMCO’s fixed-income strategies which are driven by top-down approaches involving financial and economic outlooks as well as bottom-up approaches involving the identification of undervalued securities. The fund is benchmarked against the Citigroup 3-month Treasury Bill Index and carries an expense ratio of 0.35%. MINT is currently the largest Active ETF on the market, with a market cap of $129.35 million, thanks to the reputation that PIMCO brings as an investment manager. MINT has also beaten the 3 month T-bill benchmark since inception. Find a complete breakdown of MINT here.

Disclosure: No positions in above-mentioned names.

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Disclaimer: Views and opinions expressed on EtfsHub are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on EtfsHub constitutes or should be construed as a solicitation or offer by EtfsHub to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. EtfsHub shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.