Since its March 1 launch, the Pimco Total Return ETF (BOND) has climbed almost twice as much as the mutual fund on which it is based, largely because the exchange-traded fund is much smaller and nimbler than the Pimco Total Return Fund (PTTRX), IndexUniverse ETF Analyst Paul Baiocchi said in a televised appearance on CNBC this week.
Since inception, the four-month-old ETF returned 7.25 percent through July 11, while the mutual fund has just climbed 3.82 percent—a difference that Baiocchi acknowledged had something to do with the ETF’s cheaper price, but was mostly due to its relatively small size. Both portfolios are managed by Bill Gross, perhaps the second-most-famous money manager in the world after Warren Buffett.
“In this environment, it has more to do with the fact that it can move in and out of its positions much more easily than can the big aircraft carrier that is the mutual fund,” said Baiocchi, who is based in San Francisco, where IndexUniverse has its global headquarters.
The ETF has an annual expense ratio of 0.55 percent, 40 basis points less than the mutual fund’s “A” class shares that are most appropriate for retail investors. Institutional investors in the mutual fund can get that price down to no-load 46 basis points, in size.
As an example of the advantage of being smaller, Baiocchi argued that the 3 percent of BOND’s portfolio devoted to Mexican debt isn’t all that much—at least relative to the $260 billion mutual fund, the biggest in the world.
“If you look at the top 10 holdings of BOND currently, it has a 3 percent position in Mexican bonds,” Baiocchi said. “That’s a position that it can hold at that type of weighting in a $1.7 billion portfolio. In the mutual fund that would mean they own the entire Mexican government.”
However, Baiocchi stressed that investors need to grasp that BOND and PTTRX are two different funds with different holdings—the most important difference being that the mutual fund can execute its strategy with derivatives and the ETF—as is the case with all active ETFs—cannot use derivatives at all.
“It’s really apples to oranges,” Baiocchi said about the two funds. “But I think investors that want intraday liquidity have an option in the ETF, and investors looking to save some money certainly have an option in the ETF. But the reality is that the positions held in the mutual fund are different than the positions held in the ETF.”
Echoing the oft-heard caveat in the world of money management, the IndexUniverse ETF analyst also said that while BOND is outperforming PTTRX at the moment, that doesn’t mean that will always be the case, particularly given the current environment of macroeconomic uncertainty.
“Over the long term, the question remains whether its avoidance of derivatives gives it more tail risk or less tail risk than the mutual fund. If we have credit events and they own CDSs on some of their bonds in the mutual fund, it’s likely that they’ll be safe from some of the losses that they might incur.”
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