Gross Leaves Void At BOND ETF

September 26, 2014

His departure could result in investors looking elsewhere.

If actively managed exchange-traded funds have faced head winds against cheaper index ETFs before, the challenge just grew bigger with the departure of Bill Gross from PIMCO. Gross singlehandedly made the PIMCO Total Return ETF (BOND | B) the second-biggest active ETF in the world, and his departure takes from that fund the star power of its manager’s name.

The biggest active ETF is also from PIMCO, the PIMCO Enhanced Short Maturity Strategy (MINT | B), but Gross doesn’t directly manage it.

Who will replace Gross at the helm of BOND is still unclear. If you look at the prospectus for the fund, last updated when BOND was brought to market with fanfare in 2012, there’s an actual picture of Bill Gross under “portfolio manager” with no other names. He wasn’t exactly known as a man who often shared the limelight.

The Wall Street Journal reported that deputy chief investment officers Mark Kiesel, Mihir Worah and Scott Maher will now run BOND's mutual fund counterpart, the PIMCO Total Return Fund, but there was no mention of BOND. Calls and emails to PIMCO remain unanswered.

New Managers, New Risks

There’s no question that what made BOND the most successful active ETF launch ever was Gross’ name behind it.

His departure could suggest the fund’s prestige as the exchange-traded brainchild of one of the world’s best-performing fixed-income managers could be about to dissipate, according to fund industry sources. As the prestige goes, so could the assets.

“In our opinion, management changes add risk for investors as the investment process can and often will be altered to reflect the new manager’s preferences for assuming risk,” S&P Capital IQ’s director of ETF and mutual fund research Todd Rosenbluth said in a note today. “However, in this case, we think the departure of Gross will cause some investors to move money elsewhere.”

“Prior to today, the biggest news regarding PIMCO was tied to its flagship ETF,” he added. “While Gross was the named manager of BOND, an ongoing investigation at PIMCO regarding how it values the bonds it holds will cause more investors to question whether there are better places to invest [in] particularly a passive ETF from iShares, Vanguard or others.”

What ETFs could stand to benefit from a possible asset exodus from BOND?


BOND’s Competitors

There are a couple of actively managed competitors in the space that stand first in line to attract assets fleeing BOND—if that actually happens. In fact, the segment of global broad-market fixed-income exposure is sparsely populated, and BOND is its reigning king.

Let’s not forget that these actively managed funds are also part of a very small universe within the ETF market itself. In fact, of the $1.9 trillion tied to U.S.-listed ETFs today, less than $19 billion is invested in actively managed funds, according to data. BOND is one of the largest of such ETFs, with $3.58 billion in assets.

That said, here are the active global bond ETFs that come to mind:

  1. AdvisorShares Madrona Global Bond ETF (FWDB | D) is an actively managed global fixed-income ETF that came to market in 2011. The fund has a hefty price tag of 1.33 percent a year in expense ratio, or $133 per $10,000 invested, which might be part of the reason it has attracted only $26 million in assets. BOND, by comparison, costs 0.55 percent. But, like BOND, FWDB is actively seeking to outperform the Barclays Capital U.S. Aggregate Bond Index. The fund uses exchange-traded products to invest in at least 12 distinct global bond classes.
  2. RiverFront Strategic Income ETF (RIGS | C-35) is an actively managed global fixed-income ETF that came to market last October. The fund, distributed by ALPS, has an attractive price tag of 22 basis points, and has more than $367 million in assets under management.

In the passive realm, investors could flee to broad funds, although none truly matches BOND’s coverage breadth. Yes, BOND focuses its exposure heavily on U.S. debt, but it can allocate as much as 30 percent to foreign debt. The biggest competitors in the passive space would be:

    1. Vanguard Total Bond Market Fund (BND | A-93) invests in U.S. debt only, and costs 8 basis points a year in expense ratio. Its international counterpart is the Vanguard Total International Bond Fund (BNDX | B-53). Combined, the two portfolios, boasting $22 billion and $1.8 billion in assets, respectively, would offer a similar pool of global fixed-income securities BOND picks from. BNDX costs 0.20 percent in expense ratio.
    2. iShares Core U.S. Aggregate Bond ETF (AGG | A-97) is an $18 billion ETF that does a phenomenal job tracking the broad U.S. bond space at 8 basis points a year in expense ratio. But again, AGG is strictly a U.S. bond fund.


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