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The Other Side of Active ETFs: Follow the Money

Posted By Barry Ritholtz On April 21, 2011 @ 11:45 am In ETFs,Investing,Think Tank | Comments Disabled

Ari Weinberg is the WSJ Editor for Financial Tools; His perspective can also be seen on occasion at the Journal’s MarketBeat. [1]

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PIMCO made a big splash in the small world of actively-managed exchange-traded funds by filing for an ETF version [2] of its Total Return Fund.

As many have accurately noted, PIMCO’s filing makes a statement to the traditional mutual fund world that Bill Gross, who has $236 billion at his command, isn’t afraid to disclose the daily positions and valuations for thousands of assets.

Gross doesn’t need to fear front runners in his market. He is the market [3]. (ht @retheauditors [4])

While the PIMCO Total Return ETF will not be a share class of the larger fund – due to Vanguard’s patent on the hub-spoke share class structure [5] – the fund will no doubt see a huge influx of cash to feed Gross’s Total Return replication.

This is where you need to follow the money.

First, it’s important to understand the business of regulated asset managers and mutual funds. Whether you like it or not, all asset managers are asset gatherers. They have to be to stay afloat and get to scale.

Hedge funds, or unregulated asset managers, have created a model in which they are paid partly for the assets they manage but mostly for the returns they generate above a benchmark.

Most regulated funds do not operate this way. The portfolio managers and the asset management companies divide the rents generated by the expense ratio. They make more money by generating returns which attract more assets. (Sure, they reduce the expense ratio as the fund gets bigger, but they’ll gladly take a smaller percentage of a bigger pie. The numbers still work out fine. Just ask Bill Gross [6].)

But Gross didn’t become a billionaire by simply running his actively managed mutual fund. He followed the money.

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Continues at MarketBeat. [1]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2011/04/the-other-side-of-active-etfs-follow-the-money/

URLs in this post:

[1] MarketBeat. : http://blogs.wsj.com/marketbeat/2011/04/21/the-other-side-of-active-etfs-follow-the-money/

[2] ETF version: http://online.wsj.com/article/SB10001424052748703838004576275342296588656.html

[3] market: http://www.bloomberg.com/news/2010-12-30/pimco-to-pay-92-million-to-settle-futures-lawsuit.html

[4] @retheauditors: http://twitter.com/#%21/retheauditors

[5] hub-spoke share class structure: http://online.wsj.com/article/SB10001424052748704312504575618902488689456.html

[6] Bill Gross: http://www.forbes.com/profile/bill-gross

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