of 11.3%, and most analysts gushing over it every chance they get. In short, the PIMCO Total Return ETF (BOND) has been a raging success in all areas except one – it failed its “Prime Directive” of being the ETF version of the PIMCO Total Return Bond Fund.
Actively managed ETFs have struggled to gain traction with investors. To overcome this hurdle, investors were sold on the concept that BOND would be the ETF version of the PIMCO Total Return Bond Fund (PTTRX), a traditional actively managed mutual fund with an excellent long-term track-record and a star manager – Bill Gross. PTTRX and its other share classes constitute the largest mutual fund in the world with more than $285 billion in assets, putting it nearly $100 billion ahead of the second largest fund. Creating an ETF version would be a slam dunk. To solidify the marketing concept, the new ETF was given the same name as the mutual fund.
|Fund Stat||ETF Version||Mutual Fund Version|
|Number of holdings||797||~20,600|
|SEC 30-day Yield||2.43%||1.23%|
|1-Year Total Return||12.62%||7.61%|
|1-Year Price Return||9.59%||1.00%|
|Correlation (r) to PTTRX||0.697||1.00|
You can see the differences in every statistic. However, the last one is the most telling. BOND has an r-squared of only 0.486. That’s a level that diversified holdings strive to achieve. Cloning attempts should be 0.95 or better.
With a correlation this low, I wanted to see BOND’s correlation levels to other funds. Using the tools and database from Investors FastTrack, I ran correlation studies of BOND against three different fund universes.
First, I compared it to 625 intermediate-term bond funds, which constitute its peers. That showed BOND is more highly correlated to 125 other funds than to PTTRX. Next, I compared it to all 2,181 bond funds in the database, and that showed 146 funds with higher correlation.
Lastly, I looked at all 11,288 constituents in the Investors FastTrack database. I found 150 funds with higher correlation readings to BOND than PTTRX has. In all three cases, the mutual fund with the highest correlation to BOND is the TCW Core Income Class N (TGFNX) at 0.849.
Someone is bound to say, “It doesn’t matter. So what if the correlation is low? Just look at the performance!” Yes, most of the differences turned out to be positive differences in its first year. However, with such a low correlation, it could have gone the other way.
To paraphrase Ray J. Johnson, “You can call it BOND, you can call it PIMCO Total Return ETF, or even call it a great bond ETF, but don’t call it the ETF version of the PIMCO Total Return Bond Fund.
Written By Ron Rowland From Invest With An Edge Long PTTDX.
Ron Rowland is the founder of Invest With An Edge and serves as the Executive Editor. He is also editor of AllStarInvestor.com and Chief Investment Officer of Capital Cities Asset Management (www.ccam.com). Quoted widely in the financial media, Ron is the industry go-to guy for sector rotation insight and investment strategies using ETFs and mutual funds.