A New Kid on the European Fixed Income ETF Block

PIMCO and Source are joining forces to create a new ETF platform and become the first provider of actively managed fixed income ETFs in Europe

Jose Garcia-Zarate 13 December, 2010 | 4:56PM

The European fixed income ETF market will be welcoming a new provider in 2011. PIMCO, the world’s leading fixed income manager, and Source are joining forces to create “PIMCO Source,” a new ETF platform that has just received approval from the Irish regulators to create and distribute fixed income ETFs. The first wave of products is expected to hit the marketplace in early 2011. Both Source and PIMCO will share responsibility for the platform’s operational matters, although PIMCO is to take the leading role as fund manager given their experience in all things fixed income.

While keeping coy about the specifics of the product range in the pipeline, some key messages have been put forward. First and foremost, PIMCO Source’s goal is one of competition via innovation. Innovation in terms of how to gain fixed income market exposure but also in terms of fund management style, for it is understood that their ETFs will combine both active and passive. As per the replication methodology used, while not closing the door to swap-based vehicles, PIMCO Source’s fixed income ETF offering is expected to be mostly physically replicated.

If confirmed, or better said, when confirmed, PIMCO Source will thus become the first provider to offer actively managed fixed income ETF in Europe. This news put an end to growing speculation in market circles about who would be the first to try their luck in the field of actively managed fixed income ETFs. PIMCO is of course no stranger to actively managed fixed income ETFs in the US and one can only wonder whether they intend to replicate their successful Enhanced Short Maturity Strategy Fund, commonly known by its ticker MINT, on this side of the Atlantic. MINT is an actively managed ETF which seeks higher income potential than money market ETFs currently in the marketplace. It was launched in November 2009 and has already amassed some $800 million in AUM. MINT’s success is hardly surprising given PIMCO’s strong brand name and the rather paltry returns on offer via money market funds, whether indexed or not, in the current ultralow interest rates environment.

Interestingly, in the article Money Market ETFs: Brighter Prospects Ahead? published on November 8, we highlighted how the way most European money market ETFs are constructed makes them rather unforgiving vehicles for cash equitisation purposes. At the time, we argued that for money market ETFs to establish themselves as serious contenders vis-à-vis traditional funds, it would be essential for money market dynamics to revert to pre-crisis settings. Well, we may not have to wait for that to take place if a European version of MINT comes along.

Morningstar’s Global Head of ETF research Scott Burns recently conducted an interesting interview with PIMCO Director of ETF product management Don Suskind, in which he discussed MINT as well as other innovative additions to the US fixed income ETF market such as maturity segmented TIPS ETFs. Could the latter also be one of the innovations coming along for Europe? We’ll have the answer in early 2011.

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About Author

Jose Garcia-Zarate

Jose Garcia-Zarate  is a senior ETF analyst with Morningstar Europe.