In case you missed it, PIMCO- bulwark of the mutual fund sect- is aligning with the enemy. Via Reuters:
Pacific Investment Management Co has received approval from the Securities and Exchange Commission to launch its total return exchange-traded fund on March 1, Pimco said on its website..
The company announced plans last year for the actively managed ETF, which will mimic the strategy of Pimco’s Total Return Fund.
The firm expects that the fund will eventually be one of the biggest ETFs available, Bill Gross, co-chief investment officer of Pimco and the manager of the mutual fund and ETF, told attendees of the ETF Virtual Summit, an online conference held on Tuesday.
“Here is an opportunity for the small investor to get into a Pimco product,” Gross told attendees. “The Total Return fund is the largest in the world … We expect for the Total Return ETF to be the biggest as well.”
When we say enemy, we mean enemy of mutual fund diehards. The ETF structure, generally speaking, has been a little more fee friendly historically, and investors have been clamoring for them to open up further for some time now. To be frank, we don’t really care that much. After all, until they start making mutual funds or ETFs that are noncorrelated to traditional asset classes, it’s just more of the same. What is perhaps more notable is that, should this be the beginning of the end, as Brown proclaims, it will be occurring just as the underperforming managed futures mutual fund attempts to make its big push.
As a general recap, we don’t particularly care for these managed futures products. For one, they’re not really managed futures, as they don’t boast anywhere near the level of transparency or liquidity of managed accounts. In some cases, like the Wisdom Tree Managed Futures ETF (WDTI), the product is managed futures in name alone, as the ETF doesn’t actually track managed futures but a commodities index (see here for further explanation). Even if it does track the performance of a portfolio of CTAs, the fees associated with mutual funds like load fees and admin fees are not included in the published performance of those funds, while the fee structures associated with CTAs are included in their reported performance. End result? You get less bang for your buck via a managed futures mutual fund than you would investing in managed accounts.
Assuming Brown is right, and the PIMCO transition is the shot heard round the world in the slow death of mutual fund popularity, will this mean that managed futures mutual fund proponents will need to shift to the ETF wrapper? Can they? We’ve yet to see anything resembling an actual managed futures portfolio in the ETF space. Since the Wisdom Tree product is not actually managed futures, the closest thing has been found across the pond, where managers like QBasis have developed ETFs that track the performance of their programs, but these ETFs still only track a single fund, and not a host of programs from a variety of managers.
Developing an ETF to track such a grouping of programs could prove very challenging, given that ETFs trade like stocks – giving investors the ability to get in and out minute by minute. What happens when the managed futures programs comprising the ETF trade in $500,000 increments (i.e. one contract per $500k), and the outflows over the past hour are $300K? Does the ETF reduce the position size by one contract, or do nothing at all? This all boils down to rounding errors and the fact that managed futures trade exchange traded futures, where you can’t go smaller than a single contract. Saying you just want to trade 0.31 contracts, for instance, isn’t going to fly. In contrast, a stock based ETF could add just 1 more share of stock, or 31 shares, and so on.
If the ETF is in the billions, these granularity issues disappear somewhat, and really do become just a rounding error – but how much will such margins of error add up to negatively affect performance is the question.
In our opinion, the best way to gain managed futures exposure is still via managed accounts, and that probably won’t change any time in the near future. Gross and the PIMCO crew may be making waves with their ETF business moves, but until they find a way to offer a managed futures product that actually lives up to the performance the name implies, it’s just a ripple in the tide pool on our end.