I'm usually skeptical of exchange-traded fund ((
)) 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
) 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
Gross runs the largest mutual fund in the world; his flagship
PIMCO Total Return ((
)) 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
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
The one caveat is that not even Bill Gross is infallible. As one
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.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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