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PIMCO Total Return Bond ETF: Bill Gross’ Foray Into ETFs Living Up To Hype (BOND)

April 17th, 2012

Benjamin Shepherd: I’m usually skeptical of exchange-traded fund (ETF) launches that are preceded by a lot of hype; generally, the harder a company works to promote a new exchange-traded product, the less value there is to it. And for the better part of the month leading up to its launch, PIMCO Total Return Bond ETF (NYSEARCA:BOND) garnered quite a bit of attention for being bond maven Bill Gross’s inaugural effort in the ETF space.

But the fund has lived up to its hype by gathering more than $300 million in assets since its launch on March 1 and is already trading an average of about 200,000 shares daily. I can’t think of a single new ETF that has gained that much momentum in its first month of trading.

That fact that it’s actively managed by Bill Gross has likely played a huge role in its success attracting assets. While there are quite a few star managers in the fund business, no other bond fund manager receives as much attention as he does. There are few days when his name doesn’t appear in print or on television, and his view of the economy can move both the stock and bond markets. Gross earned his reputation with a more than 40-year career during which he’s called some significant turns in the market. In 2005, for example, Gross predicted that the crisis in the subprime mortgage market would eventually send the global financial system reeling.

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Gross runs the largest mutual fund in the world; his flagship PIMCO Total Return (PTTAX) has more than $250 billion in assets. Those assets have largely been gathered on the strength of his long-term track record, with his fund turning in a 6.5 percent trailing 10-year return and an 8.1 percent trailing 5-year return. As a result, the fund consistently ranks near the top of all bond funds for long-term performance.

But the mutual fund has a serious drawback: cost. The fund has an annual expense ratio of 0.90 percent and retail investors who don’t have access to the institutional share class can pay a sales load as high as 3.75 percent.

PIMCO Total Return Bond ETF is essentially run as a separate share class of the flagship mutual fund. However, there are a few differences in how the ETF is managed, the most notable of which is that it can’t use derivatives. That hasn’t proved a hindrance thus far, as the ETF has outperformed the mutual fund by about 150 basis points as well as its Barclays Aggregate Bond Index benchmark by about 170 basis points.

That relative outperformance should persist over the long term, even when the ETF inevitably suffers the occasional off month, particularly when it could have benefited from the derivative strategies that Gross is precluded from employing. Nevertheless, if Gross is correct with his macro calls, he should still be able to produce substantial gains even in the absence of derivatives.

While the ETF’s 0.55 percent annual expense ratio is more expensive than the mutual fund’s institutional shares, it’s substantially cheaper than the fund’s retail share class, especially when the sales charge is also taken into account.

The ETF also offers greater transparency. While Gross has never been particularly secretive–it’s hard not to broadcast your strategy when you’re quoted in the media almost daily–his mutual fund has largely adhered to the Securities and Exchange Commission’s (SEC) mandated schedule of portfolio disclosure, which means information about the fund’s holdings is already dated by the time it’s available to the public. But like other ETFs, PIMCO Total Return Bond ETF discloses its holdings to the public on a daily basis.

With greater transparency, lower relative costs and a solid track record built by a star manager, PIMCO Total Return Bond ETF could reach at least $1 billion in assets by the end of this year.

The one caveat is that not even Bill Gross is infallible. As one example, he famously eschewed Treasury bonds last year based on his belief that they would get crushed following the end of the Fed’s second round of quantitative easing. As a result, he missed out on one of 2011’s best-performing asset classes.

Thankfully for Gross, he’s rarely wrong otherwise, so last year’s miss can be forgiven. And this year, he’s betting more on the debt of developing countries such as the BRICs (Brazil, Russia, India and China). Although emerging market nations generally have stronger balance sheets than their developed-world peers, their debt offers higher yields. And according to the ETF’s portfolio disclosures, Gross has also been betting heavily on agency mortgage bonds, which have been outperforming in recent months as the pace of foreclosures slackens.

Assuming the current global status quo is maintained or even improves, Gross should produce an impressive 2012. Check out my article, An ETF Broadcasts PIMCO’s Latest Move, for more analysis on PIMCO Total Return ETF.

Written By Benjamin Shepherd From Global ETF Profits  Disclosure: No Positions.

Benjamin Shepherd, editor of Louis Rukeyser’s Mutual Funds and Louis Rukeyser’s Wall Street, focuses on time-tested mutual fund managers and investment strategies which have proven themselves in both bull and bear markets. He and his team spend hours every month discussing the state of the global economy and the markets with many of the best known and well-respected money managers in the industry. They then distill that wisdom and their own analysis into twelve pages of actionable advice geared towards generating  returns while preserving  capital for both mutual fund and stock investors. Mr. Shepherd is also associate editor of Personal Financeone of the world’s most widely-read investment newsletters, contributing his knowledge of the fund industry to the newsletters ongoing commentary.


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