Mutual fund behemoth PIMCO has been conspicuously absent from the ETF market. Today that changed with the launch of PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ). Combine this with reports that Vanguard is bidding to buy the iShares ETF label from parent company Barclays, and it looks like we may be entering a new era of competition in the ETF business.

First, let’s take a look at TUZ. At first glance the new fund appears very similar to the iShares 1-3 Year Treasury Fund (SHY). PIMCO is waiving fees to bring the expense ratio down to 0.09%, below the 0.15% found in SHY. Look for iShares to respond with lower fees soon. Both TUZ and SHY are aimed at income investors who want the potential for a higher yield than is available in short-term Treasury bills which mature in a year or less, while also keeping interest rate risk relatively low. See the Fact Sheet and Prospectus for more info on TUZ.

Industry watchers have long wondered why some of the large mutual fund sponsors have failed to respond to the competitive threat posed by ETFs. We even thought a few months ago that Fidelity might make an offer for iShares. Apparently not, though the bidding is still open.

For PIMCO to make its very first ETF launch a near-clone of an existing ETF, and then to compete on expenses, is a very bold move. PIMCO also has the trading and marketing muscle to keep its funds active and liquid. The other large fund sponsors cannot ignore this development. At the same time, they will have a hard escaping the high-fee, performance-based culture that served them well for decades.

TUZ is only the beginning; PIMCO has other ETFs on the drawing board including its recent filing for six more – three TIPS and three additional Treasury ETFs. Whatever happens, it seems clear the ETF industry is due for some big changes.