Pimco’s first index-based ETF, the Pimco 1-3 Year Treasury Index Fund (TUZ), started trading last week. The ETF is based on the Merrill Lynch 1-3 Year U.S. Treasury Index.
Ever since Pimco made known last summer its intention to enter the ETF space many in the media have proclaimed Pimco’s entry a watershed event.
So, is Pimco’s entrance that big of a deal? In some respects, yes, in others, no.
What about the product innovation front? Not really – at least not with their first ETFs to market. Pimco is headed into well-covered areas overall. The only truly enhanced coverage among the seven new funds is in the short maturity TIPS and long maturity TIPS offerings – providing improved yield-curve granularity in the TIPS arena.
Here are the first seven Pimco ETFs and corresponding competing ETFs already in operation:
Pimco 1-3 Year Treasury Index Fund (TUZ)
Been there, done that …
iShares Barclays 1-3 Year Treasury ETF (SHY)
Pimco 3-7 Year Treasury Index Fund
Been there, done that …
iShares Barclays 3-7 Year Treasury ETF (IEI)
Pimco 7-15 Year Treasury Index Fund
Close enough … Been there, done that …
iShares Barclays 7-10 Year Treasury ETF (IEF)
iShares Barclays 10-20 Year Treasury ETF (TLH)
SSgA SPDR Barclays Capital Intermediate Term Treasury ETF (ITI)
Pimco 15+ Year Treasury Index Fund
Close enough … Been there, done that …
iShares Barclays 10-20 Year Treasury ETF (TLH)
iShares Barclays 20+ Year Treasury ETF (TLT)
SSgA SPDR Barclays Capital Long Term Treasury ETF (TLO)
Pimco Broad TIPS Index Fund
Been there, done that …
iShares Barclays TIPS Bond Fund (TIP)
SSgA SPDR Barclays Capital TIPS ETF (IPE)
Pimco Short Maturity TIPS Index Fund
Alas, an improvement – greater yield curve granularity for TIPS
Pimco Long Maturity TIPS Index Fund
An extension of the preceding
Here’s where the first Pimco ETF is likely to matter:
Symbolically & level of public awareness
The first index ETF offering by a true behemoth of the active mutual fund space – i.e., the star/sizzle factor. Similar to the excitement and anticipation generated by a gifted, top athlete in one field declaring that he or she will pursue a second sport at the professional level. Bo Jackson’s gig worked and was impressive – for a while, at least, and Deion Sanders fared reasonably well. Michael Jordan’s effort in a differently-configured arena, however, was never productive. Will real impacts demonstrated in the first sport be similar in the second? Always an exciting question.
Getting Michael Jordan or Bo Jackson engaged in a second professional sport certainly didn’t hurt the level of public attention on the games in which they participated. Likewise, Pimco’s presence in ETFland will raise the profile of ETFs among rank-and-file traditional mutual fund investors. This alone may prove to be as important to the industry’s growth as any product innovation that Pimco might bring to the table.
Fees
At 0.09% – at least for the first two years – fees on Pimco’s first index ETF would be 0.06% lower than the primary competing ETF, SHY. The industry may see a continuation of pricing pressure that an aggressive Vanguard brought to the table on a handful of largely duplicative ETFs if Pimco is to take only well-traveled, well-covered roads as it is with its first ETFs.
Here’s where at least the first Pimco ETF is not likely to matter:
Expansion of the ETF menu for investors
Adding yet another short-term treasury ETF does zippo to meaningfully expand security coverage for the industry and its investors.
Competition for Pimco’s traditional, actively managed mutual funds
Not surprisingly, the first ETF – and those slated to follow – are about as far removed as can be in fixed-income land from the patches covered by Pimco’s actively-managed mutual funds.
Whether Pimco will ultimately play a significant role in the shaping of innovation the ETF landscape will, in part, turn on the question of whether Pimco will limit itself to only creating ETFs that present no competitive threat to its suite of traditional, actively-managed mutual funds. If in ETFs it covers only those areas where it currently doesn’t tread on the active mutual fund side then Pimco will be wading outside of areas for which it’s recognized within the bond arena and, potentially, issuing a string of rather duplicative offerings relative to the industry’s existing lineup. Let’s hope that this isn’t how the story plays out. Still, though, intense fee competition and significantly enhanced public awareness of ETFs are rather bankable outcomes of their arrival.
