Why We Bought PIMCO Total Return ETF

After keeping a close eye on the PIMCO Total Return ETF (BOND) since its March listing, we recently decided it was time to buy the exchange traded fund for client portfolios at Global Trends Investments.

The PIMCO ETF managed by bond guru Bill Gross has provided a decent yield and total return. Since inception, it has gained 10% and now holds $3.7 billion in assets under management. It has an SEC 30-day yield of 2.3%.

The ETF lets investors get access to the strategy of the $281 billion PIMCO Total Return Fund for a price comparable to what institutional investors pay. [PIMCO Total Return Ranks Third in ETF Sales Since March Launch]

We bought BOND at Global Trends Investments to let our clients benefit from the expertise of Bill Gross. In the fixed-income market, bond yields have been pushed to near record lows and the Federal Reserve has pledged to keep the federal funds rate near zero until mid-2015.

In this environment, it’s even more difficult to know where things will stand week-to-week and month-to-month on the fixed-income side. Our goal in bonds is to somehow generate decent yield while maintaining principal.

As the fiscal cliff looms, the outlook isn’t positive enough for many advisors to put sideline cash back to work int he stock market. Money market funds are considered safe but the yield is basically zero. BOND appeals to us as a way to maximize yield without taking on too much risk.

In BOND, recently Gross has been buying municipal bonds and says he likes their tax advantages as the U.S. budget negotiations drag on. [Gross Buying Munis on Tax Benefits]

According to the ETF’s most recent disclosure on PIMCO’s website, it has 41% of the portfolio in mortgages, and is underweight Treasuries relative to broad bond market indices. The overweight position in mortgages has helped drive BOND’s recent performance. This is where Gross’s experience as a bond manager really comes into play. Frankly, it’s tough for most advisors and individual investors to know what to buy in mortgage debt.

When looking at BOND, we also like the liquidity that ETFs provide. Since ETFs trade intraday, you don’t have to wait until the end of the day to redeem like traditional mutual funds. Having that choice is a good thing.

BOND is knocking on $4 billion in assets in about nine months of trading. Quite simply, that’s huge. When the fund launched, Gross sounded very confident that BOND could eventually grow to become the largest ETF.

“BOND is a very new ETF, but in its short lifetime it has produced some outstanding results,” Morningstar says in an analyst report on the fund. “When BOND was launched with about $100 million in assets, Bill Gross was able to start fresh with a brand-new portfolio that had no legacy positions. The recent outperformance shows how a highly skilled active manager can add tremendous value in a small portfolio.”

The ETF version has outperformed PIMCO Total Return Fund, but I don’t think the mutual fund investors are dumping it for BOND. If the performance spread widens even more in favor of BOND, we could see some migration to the ETF clone. Or the performance could swing the other way with the mutual fund leading the way. It’s difficult to predict.

Gross had a much-publicized tough year in 2011 when PIMCO Total Return Fund underperformed due to some ill-timed bets on U.S. Treasuries.

BOND and PIMCO Total Return Fund use the same investment strategy, except the ETF can’t use derivatives due to regulatory restraints currently in place for ETFs. [Bill Gross Touts PIMCO Total Return ETF’s Active Approach]

“Because the ETF portfolio is very nimble, PIMCO’s best individual bond ideas can be bought with large percentage allocations,” Morningstar says. “Effectively, the ETF is performing like Bill Gross’s ‘best ideas’ list.”

The investment researcher notes BOND has an expense ratio of 0.55% while the institutional share class of PIMCO Total Return Fund charges 0.46% and the A-share class charges 0.90%. “For retail investors who don’t have the ability to buy institutional shares, BOND is a very good deal,” it says.

PIMCO Total Return ETF

Full disclosure: Tom Lydon’s clients own BOND.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.