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Pimco Total Return ETF Finally Goes Live

Olly Ludwig and Dave Nadig

(Updated to include trading volume in paragraph seven.)


Pimco, the world’s biggest bond fund manager, launched the exchange-traded fund version of its flagship Total Return Fund on March 1, bringing to fruition all the excitement in the world of ETFs that began last April when Pimco first filed for regulatory permission to market the fund.

The Pimco Total Return ETF (NYSEArca:TRXT - News) will have an annual expense ratio of 0.55 percent. That’s 30 basis points cheaper than the “A” class mutual fund version that’s most appropriate for retail investors. That said, it’s also possible for institutional investors, in size, to get that price down to a no-load 46 basis points.

The pre-existing Pimco Total Return Fund has more than $250 billion in assets, making it the biggest mutual fund in the world. It launched in 1987 during the heyday of the active mutual fund boom. It’s been one of the most successful fixed-income funds in the world, and has just about made its manager, Bill Gross, a household name in America.

Gross’ moves are followed by fixed-income watchers the way Warren Buffett’s stock picks are. When Gross moved the Total Return out of U.S. government debt in March of last year, it made international headlines.

That decision hurt him in 2011, when the Total Return Fund returned 4.17 percent. The year before, it had gains of 8.36 percent, and in 2009 it returned 13.33 percent. Amazingly, it even had total returns of 4.33 percent in 2008, the year financial markets plunged after the collapse of Lehman Brothers. In the past 10 years, it has had average annual returns of 6.85 percent.

Newport Beach, Calif.-based Pimco already has one of the most successful active ETFs on the market. Its Pimco Enhanced Short Maturity Strategy Fund (NYSEArca:MINT - News), a money market fund proxy, had assets of $1.43 billion as of Feb. 29, according to data compiled by IndexUniverse.

The new ETF was trading with a tight one-cent bid-ask spread in early afternoon trade, according to information posted on Yahoo Finance. Sellers were asking $99.98 a share, while bidders were willing to pay $99.97, according to the website. By the end of the session, more than 500,000 TRXT shares had changed hands, a rather splash first day of trade if there ever was one.

Not Exactly The Same

It’s crucial to note that the Pimco Total Return ETF won’t technically be the same portfolio as the Total Return mutual fund.

One big difference is that it won’t, for now, make use of derivatives the way the mutual fund does. That said, Pimco has made clear in filings that it intends to use derivatives in TRXT at some future date.

But it didn’t file for permission to use instruments like swaps in its ETFs before the Securities and Exchange Commission put on hold approval of any requests to use derivatives in active or leveraged funds nearly two years ago .

Translation:Neither Pimco nor investors should be holding their breaths for TRXT to start using derivatives.

That means the ETF may lack much of the flexibility that the Total Return mutual fund has to quickly adjust, say, the portfolio’s duration. Duration is a measure of a bond vulnerability to price changes as interest rates shift.

Also, the SEC has yet to allow any ETF to hew to the portfolio disclosure requirements of actively managed mutual funds, which call for reporting of holdings on a quarterly basis. Mutual funds are even allowed a grace period that can last up to 60 days.

So, while its TRXT will be an actively managed fund, its holdings will be transparent, meaning it must make them public every day, as it does for MINT.

Many investors and advisors fear this transparency means Bill Gross won’t be able to stay one step ahead of his competitors, thus undercutting another advantage of the mutual fund.

Part of the Total Return mutual fund strategy is to step away from fixed income when it makes sense. The fund will only target 65 percent of fixed-income exposure, and can put up to 15 percent of its assets in securities deemed illiquid. This go-anywhere strategy has served the fund well performancewise, and has led some to call Total Return a hedge fund in mutual fund clothing.

It has experienced periods of very high turnover, and it’s not uncommon for an entire sector of debt to go from 25 percent of the portfolio to nothing in a quarter should Gross make a tactical call.

It’s not yet clear how much the ETF will embrace this change-on-a-dime approach of the mutual fund, but we’ll be watching the portfolio closely to find out.

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