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Bill Gross on the “Secret Sauce” in PIMCO’s New Total Return ETF


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Bond king Bill Gross, PIMCO's founder, co-chief investment officer and manager of the world's largest mutual fund —the Pimco Total Return Fund (PTTRX) -- added another title to his job description earlier this month with the launch of the actively managed Total Return Exchange Traded Fund (TRTX). The bond ETF, which launched on March 1st, was among the most highly anticipated new trading products to hit the market in years.

"We wanted to give investors the chance to purchase the Total Return fund or a replica of the Total Return fund through the New York Stock Exchange, to access a little more liquidity, and provide more of an ability to do in-and-out trading," Gross tells Breakout in the attached video.

However, this is not an exact replica of the gigantic $250 Billion Total Return mutual fund. "Regulations do prohibit the ETF from utilizing options, and futures, and swaps," Gross explains. "Those aren't a considerable portion of the Total Return Fund, but nonetheless, there's going to be those minor differences in terms of the non-derivative characteristic."

The new ETF invests at least 65% of its total assets in fixed-income instruments including Treasury Inflation Protected Securities (or TIPS), government debt, muni and corporate bonds, and mortgage-backed securities.

As Gross mentioned, there are some different sets of regulations in the ETF space. "The big buzz on this is that it is going to diminish your performance because you've got people looking over your shoulder all the time," says Breakout co-host Jeff Macke. "No fund manager really wants their book replicated all day. Has that been a problem?" he asks.

Gross shows little concern, likening the management of this fund to a good baseball pitcher that can hide the delivery of a fastball, a curveball or a slider.

"I don't think an investor can look at the daily runs and see exactly a change in strategy or some type of nuance that would give away any of Pimco's secret sauce," he says.

As for how much the Federal Reserve's monetary policy will impact Gross' funds, again he's not too concerned. The Fed's outlook right now is to hold interest rates near zero through 2014. They also implemented Operation Twist last October —a stimulus measure that involves selling short-term Treasuries and buying the same amount of longer-term bonds. It's designed to lower the yield on longer-term bonds, which should subsequently push down interest rates on borrowing; everything from mortgages to small business loans. This policy is scheduled to remain in place through June 2012.

"It's true that they're doing Operation Twist and buying long-term bonds, but ultimately, intermediate and long-term bond yields will be a function of private market enthusiasm," says Gross. "So yes, they (the Fed) have control and it pays to watch, but it also pays to watch inflation and some of the other influences on long-term bond yields." (Gross also spoke with Y! Finance Economics Editor Dan Gross on Inflation & the Fed. See: PIMCO's Bill Gross: QE3, Inflation, Muted Growth on the Way)

Speaking of enthusiasm, Macke points out that more and more investors are chasing yield, sending inflows into bond funds to record highs. So much so, that fears of a bond bubble are resurfacing…again!

"When there's a lot of money coming in it tends to produce minor bubbles, in terms of prices. We've seen that for a long, long time," says Gross. "That's not to say this time however that in the bond market, that the flows we're seeing are a function of inordinate flows that won't continue. The Boomers are getting older and want certainty and want bonds as opposed to stocks."