PIMCO ETFs - Education - The Advantages of ETFs

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The Benefits of Exchange-Traded Funds 

Since the first U.S. ETF was launched in 1993, exchange-traded funds (ETFs) have become one of the fastest growing investment vehicles. Investors have embraced ETFs because they combine benefits of exchange trading with those of mutual funds.

ETFs share several key investment characteristics with mutual funds: they issue shares which represent fractional ownership of a portfolio of securities, they have an official valuation of the net assets of the fund at the market close each day, this is the price at which direct investors (the typical shareholder in a mutual fund but only authorized participants in ETFs) acquire or redeem shares of the fund, and they are subject to regulatory oversight by the SEC in accordance with the Investment Company Act among other similarities. ETFs or mutual funds may invest in dozens to hundreds or even thousands of securities, depending on the fund.

As an investment vehicle, however, ETFs have key attributes that set them apart from traditional mutual funds, including:

  • Exchange Trading: Similar to stocks, ETFs can be bought and sold on a major exchange (such as the New York Stock Exchange or NASDAQ) throughout the day. Investors can also use stop-loss and limit orders, and potentially short-selling. Options may also exist on ETFs. By contrast, mutual fund shares may be purchased or sold only once daily, at the market close at NAV, and investors can only take long positions by buying the shares directly from the fund provider. ETF shares may trade at a premium or discount to NAV; transactions in ETFs involve trading commissions and a bid/ask spread like other securities transactions.
  • Transparency: ETFs tend to be more transparent than traditional mutual funds because ETF holdings are typically disclosed daily, while mutual funds typically only disclose holdings on a quarterly basis with some lag.
  • Single Share Class: The ETF structure has a single share class for all investors, from individuals to institutions. This simplified structure means that all investors have the same expense ratio and largely unrestricted access to any given ETF.
  • Tax Efficiency: Another advantage of ETFs is that they may be more tax efficient than traditional mutual funds. When most ETF investors sell shares, they do so on an exchange to another investor who buys the shares, which leaves a fixed number of shares and does not require a cash redemption from the fund company. In order to raise cash to meet redemptions, traditional mutual funds may need to sell securities in a taxable transaction. Further, when an ETF redeems existing shares, the redemption may be an “in kind” exchange of securities instead of cash, avoiding a taxable event. As a result, when in-kind redemptions occur, other ETF shareholders may not incur capital gains due to another shareholder’s transactions.

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus, which may be obtained by contacting your PIMCO representative or by clicking HERE. Please read the prospectus carefully before you invest or send money.

Exchange Traded Funds (“ETF”) are afforded certain exemptions from the Investment Company Act. The exemptions allow, among other things, for individual shares to trade on the secondary market. Individual shares cannot be directly purchased from or redeemed by the fund. Purchases and redemptions directly with ETFs are only accomplished through creation unit aggregations or “baskets” of shares. An investment in an ETF involves risk, including the loss of principal. Investment return, price, yield, and NAV will fluctuate with changes in market conditions. Investment policies, management fees and other information can be found in the individual ETF’s prospectus.

Investing in the bond market is subject to certain risks including the risk that fixed income securities will decline in value because of changes in interest rates; the risk that fund shares could trade at prices other than the net asset value; and the risk that the manager's investment decisions might not produce the desired results. Certain U.S. Government securities are backed by the full faith of the government. Obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value.

ETFs are subject to secondary market trading risks. Shares of the Fund will be listed for trading on an exchange, however, there can be no guarantee that an active trading market for such shares will develop or continue. There can be no guarantee that the Fund’s exchange listing or ability to trade its shares will continue or remain unchanged. Shares of the Fund may trade on an exchange at prices at, above or below their most recent NAV. The per share NAV of the Fund is calculated at the end of each business day, and fluctuates with changes in the market value of the Fund’s holdings. The trading prices of the Fund’s shares fluctuate continuously throughout the trading day based on market supply and demand, which may not correlate to NAV. The trading prices of the Fund’s shares may differ significantly from NAV during periods of market volatility, which may, among other factors, lead to the Fund’s shares trading at a premium or discount to NAV.

Buying or selling ETF shares on an exchange may require the payment of brokerage commissions. Due to the costs inherent in buying or selling Fund shares, frequent trading may detract significantly from investment returns. Investment in Fund shares may not be advisable for investors who expect to engage in frequent trading.