TOTL: All Hail the New Bond King

Perhaps the biggest winner in the Bill Gross PIMCO saga has been DoubleLine CEO and CIO Jeffrey Gundlach.

doubleline dbl 185Like Gross, Gundlach has made a name for himself in the bond world by going against the grain, making gutsy calls and shifting assets among various types of I.O.U.’s.

More often than not, those calls have been right. And with numerous correct calls, many market pundits have begun calling Gundlach the next “bond king” and DoubleLine the heir apparent to Pimco’s throne.

Well, you can add another feather to Mr. Gundlach’s cap that was worn by Gross: He now has his own actively managed exchange-traded fund.

The new SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL) offers investors the ability to bet on Gundlach’s genius in a cheap, convenient product.

TOTL: Following BOND’s Lead

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

With Bill now over at Janus and other managers running BOND, those investors’ looking for guru guidance in the bond market were left at a loss. Which made this the perfect time to launch a new ETF headed by Gundlach and DoubleLine.

TOTL will be run similar in style to DoubleLine’s Flagship Total Return Bond Fund (DLTNX) — which is headed by Gundlach. The new ETF will have the ability to bet on any kind of bond that the guru deems worthy. That includes everything from staid U.S. treasuries and bread-and-butter corporate bonds to emerging market debt and junk bonds.

Historically, Gundlach has been a big fan of various asset-backed securities (ABS), aka mortgage bonds. In fact, Morningstar pegs a full 74% of DLTNX’s holdings in various agency/non-agency mortgage-backed securities (MBS) and commercial mortgage bonds. The average mutual fund in the same category only holds around 29% in MBS bonds.

Additionally, as a total return fund, Gundlach will be able to shift the holdings of TOTL to gain extra yield or opportunistically profit from mispricings in the bond market.

Those kind of bold calls are basically what has made Gundlach and DoubleLine stars among the bond community. They’ve also helped on the return front as well. DLTNX has managed to beat the broad Barclay’s U.S. Bond Aggregate Index by about 2% per year since launching.

DoubleLine Is Even Better In ETF Form

Gundlach should be able to juice returns even farther in his total return ETF. One of the problems with mutual funds is when they get too big, managers tend to have a hard time getting excess returns. When you have a lot of capital, it takes some pretty big bets to really move the needle. You can’t make small-calculated bets on bonds or stocks.

Investors have plowed big time money into the DLTNX, which now has roughly $44 billion in assets. That’s enough money that even Gundlach has started to question his return potential and is thinking about closing the fund to new investors.

Smaller is better when it comes to actively managed funds. BOND managed to outperform its mutual fund version — the PIMCO Total Return Fund (PTTAX) — by several percentage points while Gross was still in charge.

The Total Return ETF should be able beat DLTNX on the returns front, due to its smaller size and the ability for Gundlach to be more nimble in security selection. Think of TOTL as the “best ideas” from Gundlach in an exchange-tradable wrapper.

Another benefit for investors in The Total Return ETF: it’s going to be cheaper. Expenses for the ETF will only cost 0.55% — or $55 per $10,000 invested — to own. That compares to 0.73% for DLTNX. Over time, fund expenses do add up, and lower-cost options do end up beating more expensive rivals. All things considered, TOTL should outperform DLTNX solely based on the difference in cost.

Buy The Total Return ETF

While I wouldn’t give up on my index funds just yet, investors looking for a satellite position for their bond portfolios should really consider adding Gundlach’s Total Return ETF. Ultimately, TOTL should be able to outperform its sister DLTNX, which means you’ll be getting one of the next great bond manager’s best ideas in a cheap, convenient package.

It’ll be interesting to see what Janus and Bill Gross do in the ETF department, now that Gundlach has his own exchange-traded fund. But until then, if you want to bet on one of the greats in the bond world, Gundlach and TOTL are the obvious choice.

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

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