Three years ago, I was in the cafeteria of a well-known mutual fund company chatting with one of the portfolio managers of a large stock fund. We had both seen the announcement earlier that Vanguard would soon be rolling out additional ETFs, all with expense ratios in the teens (less than 0.20%).

I will never forget his comment. "My job just got a lot tougher," he lamented.

And he was right. In February 2005, Vanguard had $7 billion in ETF assets. Three and a half years later, it is above $50 billion.

Today, I'm sure portfolio managers in mutual fund complexes across the globe are echoing similar sentiments after hearing about PIMCO's recent intention to offer ETFs. (See related story.)

I am reminded of that conversation because, as a few other commentators have noted, PIMCO's entrance into the ETF business is a big deal ... perhaps bigger than we are all appreciating today.

In the early '90s, Schwab's introduction of the One Source platform "changed the game" for many fund complexes. They were knowingly or unknowingly "consolidated" by Schwab's action. This could be a game-changing action by the biggest brand in actively managed bonds.

Why Is PIMCO Moving In?

They are not doing it to be philanthropic. I see this primarily as an offensive measure. Pure and simple, they see a business opportunity. PIMCO realizes how many investment dollars are flowing into fixed-income ETFs and they want to grab some of the action. Why? It's simple: PIMCO's one of the few active managers who can pull this off because they can leverage relatively strong historical results and a large asset base.

Only firms who are dealing from a position of strength could entertain this type of initiative. Very few other mutual fund families could attempt this sort of bold action. PIMCO's obviously confident enough in its past abilities to "take alpha" in active strategies that it's willing to offer passive strategies.

It is possible PIMCO's offering of ETFs could be construed as a hedge to future underperformance. If so, maybe deep down this is a defensive measure. But either way, it sure looks like a brilliant move by PIMCO.

The asset management firm has no doubt recognized the time's ripe for growth with bond ETFs. In a single-digit return environment as we are in for the foreseeable future, PIMCO realizes that costs are increasingly important to investors. It also must see the advantages inherent in the structure of ETFs as an investment delivery mechanism.

A Shot Across The Bow

PIMCO's move into ETFs increases the competitive pressure on the average mutual fund. A major player, who is already a category killer on the active side, is aiming for a whole new segment. For those firms not used to dealing from PIMCO's position of strength, this is a real shot across the bow.

I'm quite sure this is generating a lot of internal debate in product management and strategic planning conference rooms among the more thoughtful mutual fund firms.

How do they compete with this development? Lower fees? Come out with their own ETFs and risk cannibalizing their base of actively managed funds? Find new and better ways to consistently take additional alpha from other mutual funds?

None of these are easy solutions in countering PIMCO. At the same time, ETFs are tracking to take share away from traditional funds again in 2008 - even in more-turbulent capital markets. This PIMCO initiative could well accelerate the erosion of mutual fund market share.

What Does It Mean For ETF Investors?

This is a great development for investors. Competition is a good thing. The fixed-income area is a segment of the ETF world that needs more choice. PIMCO is identifying a need and attempting to leverage a strong presence. It is taking a risk, and if that risk pays off by serving investors well, PIMCO will be rewarded. Isn't that how the world should work?

Will July 29, 2008 turn out to be a watershed moment? I think it may well be one for the mutual fund industry. Inflection points are hard to see in real time; they are only seen in retrospect. I think many mutual fund families will look back and say we were "PIMCO-ed." An 11 basis point Vanguard fixed income ETF is tough competition for all, but PIMCO is in a great position to compete. As an ETF investment manager specializing in all ETF portfolios, I welcome the risk-taking and the innovation of new entrants into the ETF world.

William Koehler is chief investment officer at ETF Portfolio Solutions. He's a regular contributor to IndexUniverse.com and can be reached at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .