U.S. Markets closed

Bill Gross Readies PIMCO For An ETF Explosion

Dividends & Income Daily

By Dividends & Income Daily:

Exchange-traded funds (ETFs) are, hands down, fantastic investments. They provide a tremendous amount of variety, with access to all kinds of investments, liquidity, usually low expenses and the ability to trade them during the day like a stock.

Traditional open-ended mutual funds, on the other hand, also provide a lot of variety, but are often more expensive than their ETF counterparts and can only be traded at the close of business. Further, with a mutual fund, you don't know what price you'll get when you buy or sell it until after the trade is executed.

Because of these plain-as-day advantages that ETFs hold, mutual fund companies continue expanding their ETF rosters.

One of the best-known fund institutions, PIMCO -- famously founded and run by "Bond King" Bill Gross -- is doing exactly that, readying three ETFs with the same names as three of PIMCO's already-successful mutual funds. Will the ETFs follow suit?

Big, Bad Bond Business

If you ever owned a bond fund, there's a pretty good chance it was managed by PIMCO.

Its flagship fund, PIMCO Total Return (:PTTRX), is the largest bond fund in the world with nearly $268 billion in assets. For many years it had been the standard by which other bond funds were measured. And despite a rough couple of years recently, it's still king of the hill.

But now PIMCO is branching out and making inroads into ETF territory. At present, the company is readying the launch of PIMCO Diversified Income Exchange-Traded Fund (Proposed Ticker: DI), PIMCO Real Return Exchange-Traded Fund (Ticker Forthcoming) and PIMCO Low Duration Exchange-Traded Fund (Proposed Ticker: LDUR).

These new ETFs -- it's probably no coincidence -- have the same names as three existing PIMCO mutual funds: PIMCO Real Return Fund (:PRRIX), PIMCO Low-Duration Fund (:PTLDX) and PIMCO Diversified Income Fund (:PDIIX).

Here's the breakdown:

  • The Diversified Income ETF will seek total return by investing in fixed-income assets issued both within the United States and elsewhere of both public and private entities.
  • The Real Return ETF will seek total return through inflation-indexed bonds issued by the U.S. and non-U.S. governments, agencies and corporations.
  • Finally, the Low-Duration ETF will seek total return through a diversified portfolio of fixed-income instruments issued by U.S. and foreign public and private sector entities with an average duration of one to three years.

But similarly named funds with similar-sounding strategies don't necessarily mean similar results. Last year, PIMCO launched the PIMCO Total Return ETF (BOND - News), which is the sibling of the aforementioned PTTRX. At the time many investors might have thought, "Hey, I've already got shares of the PTTRX, why do I need BOND?

Well, the answer, which applies to the pending new funds as well, is that despite the similar-sounding name and general characteristics, the mutual funds and the ETFs aren't exactly the same.

There are a few reasons for this:

  • Mutual funds may need to maintain higher cash levels to meet daily redemptions, lowering potential total return.
  • An ETF launched today will be structured differently than a mutual fund with the same strategy launched in the past, simply because of the change in price of securities over time.
  • Lastly, even expenses can vary. For instance, BOND has total expenses of 0.55% versus PTTRX, which has total expenses of 0.46%.

Nevertheless, while some investors might select PTTRX over BOND because of its lower expenses, they'd be disappointed to learn the BOND has outperformed PTTRX over the last year, returning 3.11% versus the latter's loss of 0.50%.

Long story short, I'm looking forward to seeing these funds begin trading so I can compare them to their mutual fund cousins. If PIMCO manages to be as successful managing ETFs as it has in other areas, its offerings will be very investable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.