When you say “Bill Gross” in the bond arena, it’s akin to hearing “Warren Buffett” roll off the tongues of equity investors. Gross, founder and co-chief investment officer of PIMCO, is one of the most successful fixed-income money managers around the globe. His flagship mutual fund, PIMCO Total Return Fund (MUTF:PTTRX), is the world’s largest mutual fund, with a mandate to invest 65% or more of its assets in fixed income.
Recently, Gross made news by announcing he will launch an almost-cloned exchange-traded version of PTTRX — the PIMCO Total Return ETF, dubed TXRT — on March 1. It won’t be exactly the same as PTTRX, as the ETF will not invest in derivative instruments.
I think the ETF is a good idea for a few reasons:
- I like ETFs better than mutual funds because of their added liquidity, lower fees, and greater tax efficiency.
- Diversification. As I said in arecent article, an adequately diversified portfolio is key to investment success. And at least a small portion of your holdings should be devoted to fixed income.
- The ETF will allow retail investors who can’t afford — or don’t want to buy — individual bonds to participate in government and corporate bonds of varying maturities, giving them a chance to play in the big leagues of fixed income like institutions do with PTTRX.
- Gross — minus very recent history — has a fabulous track record, garnering an average annual return of 6.92% for the past 10 years, and an 8.63% average for five years. That handily trounces his peers, who saw gains of 5.27% and 5.89% for 10 and five years, respectively.
Gross stumbled a bit when he decided to get out of U.S. government debt last March. Bad timing in hindsight, as PTTRX returned 4.16%, compared to 8.83% in 2010 and 13.83% in 2009, according to Yahoo. Morningstar reports that PTTRX’s 2011 returns lagged behind almost 70% of its competitors — a rare place for Bill Gross.
But, as I always say, “One year does not a good investment make.” What is more important — especially in funds and ETFs — is quality management with a good overall track record. And that’s what you get with Bill Gross. PTTRX was launched in 1987, has accumulated $244 billion in assets, and last year was the first time since 1993 that the fund had an outflow — about $5 billion.
Now back to the Total Return ETF. Another reason I like it is transparency. Gross has been very open — unlike most other mutual fund managers — with telegraphing his intentions and portfolio strategy. In the ETF world, this is mandatory, as daily positions must be publicized, where mutual funds only have to report their portfolio positions quarterly or semi-annually.
Additionally, TRXT’s expense ratio is slated to be 0.55%, although institutions will be able to knock that cost down to about 0.46%. According to ETFdb.com, there are about 15 funds in the total bond market category, with an expense ratio averaging 0.26%, so TRXT will be on the pricier side. But, hey — if your returns are beating your competition more than the differential of the expense ratios, what’s not to like?
As always, investigation and analysis is warranted to make sure any investment is a good fit for your personal investing strategy. And remember: This ETF is but one tool in your arsenal for portfolio diversification.
But it might be just the one you need to add a little fixed income to your holdings.
As of this writing, Nancy Zambell did not hold a position in any of the aforementioned positions.