On Wednesday, widely followed investment guru Bill Gross filed to launch an exchange-traded fund version of his PIMCO Total Return Fund (symbol PTTAX), the world’s largest mutual fund. Experts say this could be the start of something big.
“We’ve never really had a personality or a rock star behind an ETF,” says Tom Lydon, editor of ETFTrends.com. “This type of entry in the active-management ETF space is going to give it the push that we’ve all been waiting for.”
Late last year, ETF assets surpassed the $1 trillion mark, but most of that money is invested in more traditional, passive ETFs that primarily track indexes. Active ETFs, which are run by managers who make buy and sell decisions, launched in 2009. Since then, many experts have cheered their growth. Although these ETFs look a lot like actively-managed mutual funds, there are a number of differences between active ETFs and actively-managed mutual funds, such as how they trade throughout the day and how trading is taxed. Here are four reasons individual investors should take note of this new trend:
Lower fees. Generally, ETFs have lower fees than traditional mutual funds. According to Morningstar, the average annual fee of an actively managed U.S. bond mutual fund is 1.03 per cent, while the average fee for an active U.S. bond ETF is only 0.52 per cent. (Of course, traditional, passively-managed ETFs remain the cheapest. The average U.S. bond ETF charges only 0.34 per cent.)
[See The Case for Active ETFs.]
PIMCO hasn’t yet said what it will charge, but Morningstar analyst Robert Goldsborough expects the fund’s fees to be lower than the retail mutual fund. The question, he says, is what the ETF’s fees will be relative to the mutual fund’s institutional-class shares. Currently, institutional shares of PIMCO Total Return levy annual fees of 0.46 per cent.
Greater liquidity. ETFs trade on exchanges like stocks, so investors can buy and sell shares of an ETF throughout the day. Mutual funds, on the other hand, are only priced once at the end of each day.
More transparency. ETFs release a list of their holdings on a daily basis, while mutual funds generally report holdings on a monthly basis. With active ETFs, investors can more closely follow managers’ actions on a regular basis.
Higher tax efficiency. By design, ETFs are more tax efficient than mutual funds. Essentially, ETF investors don’t have to pay taxes on their capital gains until they sell. (With mutual funds, investors may incur taxes when a manager sells securities in the fund.) Still, it’s important to remember that the most tax-efficient funds are those that are passively managed.