PIMCO was one of the first legacy asset managers to enter the active ETF market with the launch of MINT. What led to the decision to enter in 2009?

Back in 2009, when we launched our first Active ETF (MINT), PIMCO recognized that the ETF represented an improvement in the technology of investing. ETFs were free of the confusing alphabet soup of share classes, required no minimum investment or limits on trading, and enabled immediate access and execution for investors on centralized exchanges. It had a range of virtues for advisors and investors.

MINT was a natural outgrowth of our commitment to innovation and the conjunction of PIMCO’s deep expertise in front-end markets with our liquidity management capabilities. The ETF just made sense as the vehicle of choice. Of course, different investment vehicles offer a variety of pros and cons. It’s simply a matter of vehicle preference by clients, and we are vehicle-agnostic. We’ll meet the investor where they want to be met in terms of vehicle—separate account, Mutual Fund, ETF, or other. We think it’s what we deliver in the vehicle that matters most.

It’s unfortunate that the letters “E.T.F.” have for many years spelled “passive.” The knee-jerk reaction for many has been to see ETFs as both low cost and passive by default, often without regard to the potential opportunity and outcome of a particular fund, net of fees. This reflex is not a healthy one, and so we applaud the emerging consciousness around active ETFs, which we think will help investors focus on the benefits of the vehicle itself, regardless of investment style. While PIMCO’s active ETF journey began with MINT, the continued growth of fixed income ETFs constitutes a clear message that PIMCO has embraced: to deliver more of its leading active fixed income strategies in an ETF format, which clients increasingly prefer. One very recent indication of that: Our new, actively managed, Municipal Income Opportunities ETF (MINO), launched on the NYSE on September 9, 2021.

Over a decade later, the PIMCO suite of fixed income ETFs now exceeds $26.5 billion in assets across 16 ETFs. How has the active ETF market evolved and what tailwinds/headwinds do you see on the horizon?

In 2009, the percentage of actively managed ETFs was 0.9% of fixed income ETFs and 0.05% of all fixed income assets.1 The very notion of an active ETF seemed an oxymoron at the time. But it’s heartening today to acknowledge that, while active equity ETFs have only recently gained some notoriety and assets (and even to this day constitute only about 1% of the total), active bond ETFs in the US have grown to over $125 billion and today account for more than 10% of all fixed income ETFs.2

Most of the first wave of participants congregated around ultrashort bonds as a distinct category, and even today you see the remnant of that early focus. The evolution from there to include the full fixed income opportunity set was both natural and welcome -- from taxable bonds to munis, and also out the curve to include a more representative menu of options, even reaching to more complicated areas like senior loans and preferred securities. While arguably still not fully “mature” I think the active fixed income ETF market is clearly ripening, and the fruits of that are accruing to the array of issuers recently entering the space.

That kind of tailwind, the sheer pace of new product launches across the fixed income continuum, is putting active fixed income ETFs squarely in the center of the dashboard for clients. This, we would argue, is a highly salutary outcome, which only increases awareness among investors and gives them access to a far broader palette of opportunity -- allowing them to make the active versus passive decision apart from their vehicle preference. And this is true, by the way, for both individual and institutional investors in the US.

As a global active fixed income manager, what benefits and/or nuances come with operating an ETF product lineup compared to other investment wrappers (i.e., Mutual Funds, CITs, etc.)?

In some cases, the benefits far outweigh the nuances. For example, in Canada where we operate a series of ETFs that are “share classes” of their corresponding mutual funds, it’s a fairly simple and satisfying approach. The PMs manage the funds as one, and we are able to offer more “investment wrappers” and freedom of choice for investors across strategies, by vehicle.

From an operational perspective, there are important considerations. One of the primary operational differences between the ETF and most other popular investment technologies is that the ETF offers multiple sources of liquidity. In contrast, mutual funds allow investors to purchase shares at NAV, but may only meet net redemptions through the sale of assets. Closed end funds do not have to sell underlying assets, but must be sold by investors at the prevailing premium/discount to NAV. ETFs trade on exchange, buyers and sellers provide secondary market liquidity, aided by market makers. Additionally, authorized participants may transfer cash or securities with the portfolio in exchange for shares, providing primary market liquidity as well as potential tax benefits. The ETF wrapper enables fixed income managers to offer portfolios with liquidity that in many cases exceeds what is available in the underlying holdings. Shareowners of the ETF are protected from the impact of buyers and sellers of the fund by the nature of the ETF vehicle, essentially limiting the impact of that order flow. Investors must weigh these attributes against the intraday market volatility faced by exchange traded products and the potential for market price/NAV dispersions.

To enable these benefits requires significant investment in capital markets expertise, relationships with authorized participants and market makers, compliance policies and oversight procedures and, of course, technology.

What are the key considerations that investors should contemplate when considering actively managed fixed income ETFs?

We have a saying at PIMCO that “Bonds Are Different.” While the active versus passive debate in equities may be settled for many, we think active management in fixed income does pay off. While active managers generally charge higher fees, there are many reasons why active fixed income managers can add value, ranging from the role and size of non-economic buyers (e.g. the Fed), to the nature of bond index construction, and even the nature of bonds and bond trading themselves. We’ve outlined the rationale more thoroughly in some of our thought pieces, but succinctly, we’ve found active bond managers have demonstrated the potential to provide consistent alpha.

That said, there remain many considerations for investors when it comes to the allocation decision in active fixed income ETFs. First, folks need to ascertain whether a particular exposure “fits” in their portfolio, and only then consider whether active management in that exposure may be desirable. That decision could hinge on the size of the allocation, their view of the opportunity for active “alpha” in that sector, and a manager’s history in delivering consistent net of fee performance above the index in that category. For that analysis, investors should focus on firms with dedicated resources and a strong investment philosophy and track record. For fixed income strategies, capabilities within credit research, risk analytics and liquidity management contribute to successful implementation. Additionally, an investment process that incorporates macro-economic views with bottom-up acumen may provide firmer confidence. The manager’s history, size and scale could also support efficient trading within bond markets, and their continued engagement with issuers facilitates access to new issues. Certain firms could have embedded advantages based on these characteristics.

What guidance would you provide sponsors as they consider expanding their product offering to include actively managed ETFs?

Investors have demonstrated a substantial appetite for thoughtful, differentiated investment strategies offered in the ETF wrapper. As other firms offer active ETFs, we view their entrances as further endorsements of the value offered to clients by such products and a healthy expansion of choices available to end investors.

Managers who have previously focused solely on mutual funds will find that listing ETFs requires additional operational support and partnerships. We have deployed a depth of resources and engaged a breadth of participants to promote a healthy ecosystem around each ETF and deliver a positive experience to the end investor.

As PIMCO has built out our ETF business, we’ve found the need to invest in our relationships across capital markets, and have deeply appreciated and benefited from our partners across the exchanges themselves (such as NYSE) and the market makers who facilitate on screen liquidity and otherwise support client engagement across our strategies.

Source: Factset & NYSE Internal Database and Consolidated Tape Statistics as of 9/24/2021

*Simple average

Source: Factset & NYSE Internal Database and Consolidated Tape Statistics as of 9/24/2021

*Simple average

Source: Factset as of 9/24/2021