The move by Pimco, co-founded by bond guru Bill Gross, marks the first time in years such a high-profile mutual fund company has tried to muscle its way into the ETF business, long dominated by a handful of large-but-lesser-known asset managers that specialize in indexing, such as Barclays PLC (BCS) and State Street Corp. (STT).
ETFs, baskets of stocks or bonds that trade on an exchange, have been rapidly gaining popularity with investors, taking in tens of billions of dollars in 2008 as similar amounts fled conventional funds.
But many big-name mutual fund companies have shrugged off ETFs because they were traditionally all index funds, making it hard to distinguish new offerings and keeping management fees low, a factor that ensured profit margins were measly.
To try to win a foothold in the difficult business, Pimco will compete with leading funds on price, while promoting its offerings heavily. The company also previously discussed plans to offer actively managed bond ETFs further down the road, a way to highlight its bond-market acumen and earn heftier fees.
Pimco’s first ETF, Pimco 1-3 Year U.S. Treasury Index Fund, focusing on low-yielding short-term Treasurys, should clear important regulatory hurdles by the weekend, and be set to start trading next week, government filings suggest.
The new fund’s course won’t necessarily be easy. It will compete head-on with the $7.1 billion iShares Barclays 1-3 Year Treasury Bond ETF (SHY). To woo cost-conscious financial advisers, the new Pimco fund will charge investors annual fees of 0.09% of assets, according to its prospectus. That’s less than any other bond ETF tracked by fund researcher Morningstar Inc. and well below the 0.15% levy of the Barclays fund.