Cost-conscious investors will soon have a new offering to consider for their portfolios: an ETF version of PIMCO Total Return, the world's largest mutual fund, run by star manager Bill Gross.
The exchange traded fund will launch on March 1. PIMCO announced its plans this week, nine months after filing an application with federal regulators.
The Total Return fund is commonly found in 401(k) plans, and has an industry-leading $244 billion in assets. The introduction of an ETF version of the mutual fund is significant for several reasons, beyond Total Return's size.
The Total Return ETF will trade under the symbol "TRXT," and be managed by Gross, who also runs the mutual fund. For the most part, the ETF and mutual fund will invest in the same diversified portfolio of bonds, with maturities averaging around five years. But there will be structural differences in how investors buy and sell shares.
Mutual funds are priced once a day. That means that when an investor sells, the value is determined by the fund's price at the close of the market. ETFs are priced throughout the trading day and can be traded like stocks. That makes it possible to lock in a preferred price without waiting for a closing price.
PIMCO expects Total Return ETF investors will pay an expense ratio of 0.55 percent. That's the ongoing charge for operating the fund, expressed as a percentage of assets. That fee may tempt many individual investors who pay 0.90 percent for the mutual fund. In addition, ETFs don't charge sales loads to invest. With the Total Return mutual fund, individual investors can pay a sales load of as much as 3.75 percent upfront.
ETFs have about $1 trillion in assets, with about two-thirds of that total invested in stocks. But bond ETFs are growing at a faster pace, and the launch of the Total Return ETF could give bond ETFs another boost.
Total Return will also be a big step for the small but growing number of actively managed ETFs. Gross' reputation could be a major selling point. Morningstar named him its Fixed Income Manager of the Decade in early 2010, and he's a three-time winner of Morningstar's bond manager of the year title. However, Gross had a rough 2011. Total Return was beaten by nearly 90 percent of its intermediate-term bond fund peers, with a 3.7 percent return.
Active ETFs represent a small fraction of overall ETF assets, and they add a layer of complexity. That's because ETF are required to disclose their investments each day. This could hamper the ability of a manager like Gross to beat the market. The frequent disclosures create the risk that an ETF manager's trades could be mimicked by an opportunistic rival money manager. By comparison, mutual funds disclose holdings monthly, or in some cases quarterly. It's an issue regulators are still wrestling with as they consider applications to launch more active ETFs.