BOSTON (AP) — It now has six months under its belt. Back in March, star bond trader Bill Gross launched an exchange-traded fund version of the PIMCO Total Return bond mutual fund. It was the most eagerly awaited ETF launch ever, due to Gross' credentials and the strong record of the world's largest mutual fund.
That's not a long time, but the PIMCO Total Return ETF (BOND) is hard to ignore, thanks to its surging out-of-the-gate performance and initial success at attracting cash.
From March 1 through Aug. 27, the ETF returned nearly 8.4 percent — impressive for a fund focusing on bonds, which tend to appreciate in value more slowly than stocks, with less volatility. Performance has been even more eye-catching measured against the Total Return mutual fund (PTTAX), which pursues essentially the same strategy as the ETF. The fund has returned 4.5 percent, nearly four percentage points behind the ETF. Both are outperforming the 2.6 percent return for a broad index of U.S. bonds.
And the ETF and mutual fund are attracting bucket-loads of cash. The ETF's net deposits totaled nearly $2.2 billion from March through July — the most recent month available — according to Morningstar. The mutual fund's intake has been $7 billion.
The ETF had $100 million in assets at its launch and now has $2.5 billion in its coffers, due to new cash as well as investment gains.
"This is kind of a rock-star ETF, so it's reasonable to expect the flows will continue to be strong," says Eric Jacobson, Morningstar's bond fund research director.
Some of that cash could come from investors in the Total Return mutual fund who may be considering a switch to the better-performing ETF. But for anyone considering such a move, the equation isn't simple.
"I would caution against taking the first six months of performance as an indication that the ETF is going to perform better than the mutual fund," Jacobson says. "More than likely, performance differences between the two will even out."
Here are some reasons why, and other factors worth considering:
For the most part, the ETF and mutual fund invest in the same diversified portfolio of bonds, with maturities averaging around five years. But there are differences in how investors buy and sell shares. Mutual funds are priced once a day. 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. The PIMCO Total Return ETF is unique among ETFs because it's among a small but growing number of actively managed ETFs that seek to outperform the market. Nearly all other ETFs seek to match an index.
SAME MANAGER, BUT....
The Total Return fund and the ETF are both run by Gross, a three-time winner of Morningstar's bond manager of the year title, in addition to honors covering the last decade. Total Return has posted an average annualized return of 6.4 percent over the past 10-years, placing it among the top 13 percent in its category.
DIFFERENT TIMING, DIFFERENT PORTFOLIOS, DIFFERENT RESULTS
Unlike the mutual fund, the ETF can't invest in futures, options or swaps. Regulatory restrictions prevent ETFs from making those investments. So variations in returns are to be expected. What's more, the ETF's performance is a function of Gross' trades. With cash flowing into the ETF, Gross has had ample opportunity to put money to work. "It's given Gross the ability to get the investment positions that he wanted to take, very quickly and easily, and at the size he wanted," Jacobson says.
Contributors to the ETF's strong results include investments in mortgage securities, as well in high-yield corporate bonds and bonds issued in the world's emerging markets. Another reason for the performance gap is that the ETF recently had 800 bond investments compared with the mutual fund's thousands.
Additions to the ETF's portfolio have a bigger impact on its short-term performance than similar additions to the mutual fund's portfolio, which is about 100 times larger. When Gross makes a trade in the mutual fund portfolio, the move is often so big that it can drive prices up or down significantly in that segment of the bond market. That makes it difficult for the manager of a big fund to outsmart the market.
Jacobson gives Gross credit for maintaining strong performance despite that challenge. Still, he says the Total Return mutual fund is so big that "it's the proverbial aircraft carrier that takes forever to turn around," Jacobson says.
Total Return ETF investors 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 0.85 percent that mutual fund investors pay. Plus 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 mutual fund in a 401(k) are charged less. That's because the plans are managed by institutional investors paying 0.46 percent.
So take a close look before choosing the ETF over the mutual fund.
"If you're already investing in that fund via a retirement account, there's nothing about this ETF that screams out that you should switch to it," Jacobson says. "But the ETF is not a bad option for those who don't have that low-cost access."
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