Call it PIMCO Total Return 2.0. The world's largest mutual fund, run by star bond trader Bill Gross, will soon also be available to investors as an exchange-traded fund.
The March 1 launch could further challenge a mutual fund industry that's already losing investors to fast-growing ETFs.
For many average investors, it will present a chance to invest in Gross' historically successful PIMCO Total Return strategy for substantially lower fees.
But the calculation isn't that simple.
"You might not need the standard three years it takes to assess a new mutual fund," says Todd Rosenbluth, an ETF analyst with investment researcher S&P Capital IQ. "But it's worth waiting to understand how the ETF will operate, and its differences compared with the mutual fund."
Still, the ETF's potential advantages over the fund make this launch worth watching.
You won't be alone. New funds and ETFs don't cause investors to line up like the next generation iPhone, but this is a biggie. It's a milestone for a fund that has a huge impact on bond markets and the mindset of investment pros. PIMCO Total Return holds about $250 billion, topping the $177 billion of second-biggest fund, Vanguard Total Stock Market Index (VTSMX).
It's run by a 67-year-old whose bond trades and market commentaries are watched almost as closely as Warren Buffett's. Gross is a three-time winner of Morningstar's bond manager of the year title, in addition to honors covering the last decade. Total Return has averaged a 6.3 percent annualized return over the past 10-years, placing among the top 13 percent in its category.
That record took a hit last year when Gross went through a rough patch. The fund's 3.7 percent return trailed the vast majority of intermediate-term bond funds. Gross was too late to invest in low-yielding U.S. Treasurys, which rallied as investors sought out the least-risky assets. Total Return is rebounding this year, it's near the top of its category with a return of 2.6 percent through mid-February.
But will the Total Return ETF be a good fit for your portfolio and investing goals? Here's what investors need to know:
The ETF will trade under the symbol "TRXT." Because ETFs are priced throughout the trading day, they can be traded like stocks. That makes it possible to lock in a preferred price without waiting for a closing price. That differs from mutual funds, which are priced once a day at the market's close. But investors buying the ETF through a brokerage may have to comply with restrictions and pay commissions.
PIMCO expects Total Return ETF investors will pay an expense ratio of 0.55 percent, or $5.50 a year for every $1,000 invested. That's the ongoing charge for operations, expressed as a percentage of assets. That's less costly than the 0.90 percent that mutual fund investors pay. Plus mutual fund investors can pay a sales load of as much as 3.75 percent upfront.
Despite the ETF's low costs, there are less expensive ways to invest in Total Return. Many investors owning the fund in a 401(k) account are charged less. That's because the plans are managed by institutional investors that pay 0.46 percent.
The Total Return ETF will differ significantly from several less-expensive bond funds because it will be managed by Gross with the help of PIMCO's analysts, rather than passively track an index. Actively managed ETFs are typically more costly than index funds and they represent just 1 percent of all ETF assets. They haven't gained a significant foothold because they add complexity to traditionally index-oriented ETFs.
There's another potential pitfall. 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 his trades could be mimicked by an opportunistic rival. By comparison, mutual funds disclose holdings monthly, or even quarterly.
However, there's less of a risk that a bond manager could be hurt by copycats. That's because Total Return holds thousands of individual bonds, versus the dozens of securities in many actively managed stock funds.
Can PIMCO's expertise boost returns enough to offset the higher expenses? They have a solid track record but there are no guarantees.
The portfolios of the ETF and mutual fund won't be identical. Although both will hold a diversified mix of bonds with an average maturity of around five years, the ETF won't invest in derivatives. Those are investments such as futures and options whose value is linked to the performance of another security. The Total Return mutual fund often uses derivatives as a hedging tool to reduce risk. Because of the differences and the varying expenses, investors shouldn't expect identical returns. How widely they'll vary won't become clear until the ETF has a long-term record.
PIMCO Total Return is already huge and the ETF launch could make it more challenging for Gross to successfully manage so much money. Big funds sometimes lose a performance edge because their managers can't operate effectively when they have a huge impact on the market segment they invest in. But Gross has successfully adapted before as his funds have attracted more investors.
"If there's an upper limit to how much money Gross can successfully manage," says Morningstar's bond research director, Eric Jacobson, "I don't think we're there yet."
Questions? E-mail investorinsight(at)ap.org