State Street Pokes Pimco in the Chest, Plans New Bond ETF

Things haven’t been so rosy for and Pimco and the “Bond King” Bill Gross lately.

Healthcare SPDRFor months, recent underperformance and various internal issues — such as the departure of CEO/CIO Mohamed A. El-Erian — have investors questioning the investment manager’s funds. Gross’s flagship mutual fund, the $230 billion Pimco Total Return (PTTAX), has now seen 12 consecutive months of outflows, and investors pulled roughly $3.1 billion out of PTTAX in April alone.

But as they say, one man’s pain is another man’s gain.

In this case, that man is DoubleLine Capital’s Jeffery Gundlach. Gundlach’s $33 billion go-anywhere bond fund, DoubleLine Total Return (DBLTX) managed to score roughly $319 million worth of inflows in April. That’s on top of its steady inflows since the beginning of the year.

And just when it couldn’t get any worse for Bill Gross, Jeffrey Gundlach has announced a potentially game-changing deal in the form of a new exchange-traded fund that could keep investors abandoning Pimco in hordes.

A Potentially Great New ETF From Jeffrey Gundlach, DoubleLine and State Street

While active ETFs have been around for a while, it was Bill Gross’ ETF version of his flagship fund — the Pimco Total Return ETF (BOND) — that really broke the mold. The fund quickly amassed sizable assets and became the largest actively managed ETF on the market.

Part of the appeal of BOND was in manager Gross himself. But with his star potentially setting and the issues at Pimco coming to the forefront, BOND has suffered. Meanwhile, with Gundlach’s star rising, it was only natural for the manager to launch a rival ETF.

Enter the new SPDR DoubleLine Total Return Tactical ETF, sponsored by State Street (STT).

Bloomberg reports that the duo will launch the new bond ETF later this year, with Gundlach actively managing the fund’s holdings. The ETF basically will give Gundlach carte blanche to invest in whatever bonds he deems good at the time. That can include corporate, sovereign and mortgage-backed debt of any credit rating — junk or investment-grade. That includes up to a maximum of 25% of its holdings in emerging-market nations. Gundlach will shift the holdings to gain yield or opportunistically profit from mispricings in the bond market (hence the total return moniker).

These investment guidelines mirror very similar to Pimco’s BOND ETF.

Given that comparison, investors might want to give the new fund a go — especially if they are looking for higher returns.

All About Total Return

Total return bond funds make money not only on the coupon payments they receive, but the buying and selling of individual bonds or bond sectors as well. Historically, they’ve provided higher returns than the broad bond indices, though they usually also come with higher risks.

For years, Gundlach has been able to make the right guesses concerning the direction of interest rates and which subsectors of the bond market will perform. DBLTX has managed to beat 97% of its competing mutual funds over the last three years and boasts an average annual return of around 5.9%. Gross, on the other hand, has made some wrong bets on Treasuries and interest rates over the last few years. PTTAX has only managed to produce around a 3.7% annual total return in that time.

Now, BOND has performed better than its mutual fund version due to its smaller size and the ability for Gross to be more nimble in security selection. But the new DoubleLine ETF should enjoy the same benefit — Gundlach should be able to use the fund’s smaller size to his advantage and juice his returns a bit more.

Plus, with many advisers calling for a switching out of aggregate bond funds and into more strategic offerings to counter persistently low yields and relatively high durations, Gundlach’s fund could be a godsend for investors looking for more. The risk profiles of total return and strategic income funds have now flip-flopped with broad bond indices and their ETFs, such as the iShares Core U.S. Total Bond ETF (AGG).

Bottom Line

The risk for the new DoubleLine bond ETF lies in whether Gundlach can continue his streak of outperformance. Just like Gross and Pimco, the DoubleLine star could have a falling out in the returns department.

But without any real reason to believe that’s imminent, I think this ETF will end up being a huge hit.

When it launches, investors might want to consider adding the fund to their fixed-income holdings. Gundlach and DoubleLine seem to have it going on.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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