Called the “bond king,” Bill Gross manages the PIMCO Total Return (MUTF: PTTAX) fund, which has $237 billion in assets. And yes, he wants to increase the size of his empire even more. That is, PIMCO has filed the necessary papers to launch an actively manage exchange-traded fund (or ETF) that’s based on the Total Return fund. The proposed ticker for the PIMCO ETF is TRXT.
So why is this a big deal? Keep in mind that the typical ETF is based on an index. True, some allow for variation in the holdings so as to improve returns. But for the most part, the investment approach is passive.
But in the case of Gross’ ETF, he will have free reign to make directional bets on the markets. And for the most part, his investment instincts are spot-on. Over the past 15 years, the Total Return fund has seen an average annual return of 6.87. This is certainly a standout track record for a bond fund.
By using the ETF structure, investors will get some nice benefits. First of all, there should be lots of liquidity as traders can buy and sell shares throughout the day. It will also be possible to margin the securities as well as take short positions. No doubt, these are helpful for sophisticated investors.
What’s more, an ETF will track the underlying net asset value. Thus, there should not be a problem with persistent discounts, which can hamper returns.
But when compared to index-based ETFs, the actively-managed offerings usually have higher expense ratios. After all, they need to pay big salaries for top-notch managers.
As for PIMCO, it is no stranger to actively-managed ETFs. For example, it’s Enhanced Short Maturity Fund (NYSE: MINT) recently hit the billion-dollar mark for assets under management. Launched in in 2009, this is essentially a high-end money market fund, which invests in higher-risk securities so as to juice returns.
Yet, the sector has been fairly small so far. According to Morningstar stats, there are only 31 actively managed ETFs. Most are from top providers like Eaton Vance, BlackRock (NYSE: BLK) and WisdomTree.
Perhaps one of the reasons is the issue of transparency. According to government regulations, an ETF must disclose its holdings on a daily basis. In other words, this may tempt underperforming funds to mimic top portfolios.
But with Gross’ entry into actively managed funds, such concerns are likely to be a thing of the past. His participation is a major validation. So expect a lot of these funds to hit the market.
As for the Total Return ETF, it will not be a replica of the mutual fund. One reason is the relative sizes. Consider that the mutual fund engages in heavy uses of derivatives like futures and options.
However, the two portfolios should remain quite similar. More importantly, for those investors who love ETFs, it’s a way to follow one of the best money managers on Wall Street.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
