Smaller Toolkit
The U.S. Securities and Exchange Commission in March 2010 stopped approving applications for ETFs that would make "significant investments" in derivatives, pending a review examining whether additional protections are necessary for funds that do so.
"There's a tool in their toolkit that they don't have access to," without the full use of derivatives, Evercore's Pollak said.
Advisors who prefer buy-and-hold investing may not find the ETF's trading feature useful, said Mark Green, chief investment officer of Carmel, Indiana-based Oxford Financial Group Ltd., which manages about $10 billion.
"No one day trades bond funds," said Jonathan Bergman, chief investment officer of Scarsdale, New York-based Palisades Hudson Asset Management LP, which oversees more than $1 billion on behalf of individuals and families. "The fact that it's available intraday is inconsequential."
The ETF will charge 55 basis points in annual expenses after accounting for a fee waiver, according to fund documents. That compares with 46 basis points for the traditional fund's institutional shares, which generally are used by advisors. A basis point is 0.01 percentage point.
"If you already own the Total Return Fund with a lower fee, it's hard to see why you'd want to go into the Total Return ETF with a higher fee other than for more liquidity," Gross said in an interview on Feb. 29, referring to holdings of the institutional shares among advisors.
"We'd prefer the open-end fund," meaning the traditional fund, for its greater flexibility with derivatives and lower expense ratio, Zafran said.
Asset Flows
Actively managed ETFs received about $1.4 billion in deposits in the 12 months through January, compared with about $108 billion for ETFs that track an index, according to Morningstar. There are almost four times as many index ETFs as active ETFs.