Performance Scorecard: Bill Gross’s PIMCO Total Return ETF

Two months ago, Bill Gross told me that he thought PIMCO Total Return ETF (NYSEArca: BOND - News) could eventually grow to be the largest ETF. It’s an extremely bold prediction and there are plenty of doubters, but only a month out of the gate, the new ETF is putting up some impressive numbers in terms of performance and bringing in assets.

Launched on March 1, the fund has delivered 219 basis points of alpha, or outperformance relative to its benchmark, based on net asset value, in its first month. The benchmark is the Barclays Capital U.S. Aggregate Index.

Much of the outperformance of PIMCO Total Return ETF so far has been driven by the fund’s overweight position in mortgages. [PIMCO ETF Gathers Nearly $300 Million]

“It is a quarter beyond expectations,” Gross told The Wall Street Journal, referring to the performance of PIMCO Total Return Fund. “If we could do it for three more quarters, I would jump up and down in ecstasy.”

Meanwhile, the ETF has attracted nearly $300 million in one of the fastest asset-gathering starts for an ETF ever – and it’s just getting warmed up. The largest ETF is SPDR S&P 500 (NYSEArca: SPY) with about $106.5 billion in assets.

Investors, advisors watching performance

Through the end of March, there were 82 new ETFs listed year to date. They gathered $1.2 billion according to ConvergEx Group, so the new PIMCO ETF grabbed a significant chunk of these inflows.

Financial advisors who manage model ETF portfolios are allocating a portion of their core bond holdings to PIMCO Total Return ETF. Wirehouses could also add the ETF to model portfolios, which would provide an additional lift. [Gross Favors Shorter Duration, Inflation Protection]

Separately, some advisors and investors are waiting for a quarter or two of performance to see how the ETF version performs against the $250 billion PIMCO Total Return Fund.

The ETF has been trading with tight bid/ask spreads, while demand for the fund created a slight premium of 19 basis points to net asset value as of April 2, according to Morningstar. So far, trading volume is averaging nearly 200,000 shares a day.

PIMCO Total Return ETF should get a marketing boost from switching the ticker from TRXT to the more identifiable BOND, effective today. The ticker had been reserved but became available a few weeks ago.

Market outlook

In the first month of trading, PIMCO Total Return ETF gained 1.64% based on NAV, after fees, compared with a 0.55% loss for the Barclays Capital U.S. Aggregate Index.

In a recent Bloomberg Television appearance, Gross said he likes the bonds of developing countries such as Brazil and China, although they’re not without risk due to inflation and potential currency disorder. They offer better rates than developed markets in the U.S. and Europe, which are saddled with high levels of debt and leverage, he said.

The stock market has powered higher over the past six months, but there is a chance the Federal Reserve could unveil more quantitative easing, or QE3, at its April meeting. Gross said Fed chief Ben Bernanke “should be satisfied” with a rising stock market and U.S. housing starts, and improvement in employment.

However, the Fed could announce further support for the mortgage market rather than trying to drive down Treasury rates. It will be a “twist on another twist going forward,” Gross said.

The Fed’s “Operation Twist” is designed to force down interest rates by shifting its portfolio into long-term government bonds, but the program ends in June.

Stocks and precious metal ETFs were lower Wednesday after the Federal Reserve minutes suggested the central bank likely won’t engage in further quantitative easing unless the economy backslides. [ETFs Down on Fed, QE3 Outlook]

‘Not going to rest on this one’

Finally, investors can expect bond giant PIMCO to roll out more ETFs.

Gross told CNNMoney he’s been pleased with performance of BOND and that PIMCO is preparing additional actively managed ETFs.

“We’re not going to rest on this one,” he said. [Gross Says PIMCO ETF Not Afraid of Copycats]

PIMCO Total Return ETF

John Spence contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.