Which is best, Pimco Total Return Fund Class D (PTTDX), the mutual fund, or Pimco Total Return ETF (BOND), the active exchange-traded fund? You might be surprised at what we discovered after making our own comparison.
Before sharing the results of our mutual fund vs. ETF comparison, let’s go over a brief history of the Total Return fund. The flagship fund for Pimco, Pimco Total Return Institution Class (PTTRX), was opened to investors in 1987 and was managed by Pimco Cofounder Bill Gross, who would later rise to the status of “Bond King.”
The Total Return fund would add other share classes, plus an ETF version — BOND — and grow to be the biggest mutual fund in total assets in the world for a time.
Ironically PTTRX outperformed JUCAX in 2015.
The Pimco Total Return Head-To-Head Battle: PTTDX vs. BOND
In total, there are seven different share classes for the Pimco Total Return bond fund. Although you might see PTTRX and PIMCO Total Return Fund Class A (PTTAX) most often in financial media, they are not the share classes that are used by most do-it-yourself investors. PTTRX is the institutional share class, which requires a $1 million minimum initial investment for brokerage accounts, and PTTAX is the A-share, which charges a 3.75% front load and has 0.85% expense ratio, or $85 per $10,000 invested.
In our comparison, for the mutual fund version of Pimco Total Return, we spotlight the D-share, PTTDX, because it is a no-load fund with a 0.75% expense ratio and a $1,000 minimum initial investment.
In summary, we put forth the best overall mutual fund share class to battle the one ETF. And so, without further ado, here are the results of our mutual fund vs. ETF comparison for Pimco Total Return, PTTDX vs. BOND:
- Expenses: BOND wins with a cheaper expense ratio of 0.57% vs. 0.75% for PTTDX.
- SEC Yield: PTTDX wins with a 3.13% yield vs. 3.02% for BOND.
- Performance: BOND beats PTTDX in every calendar year since inception (2013 through 2015). The three-year annualized return for BOND is 2.1%, which compares to 0.8% for PTTDX.
- Tax-Efficiency: BOND wins with a three-year tax-adjusted return of 0.49%, compared to -0.79% for PTTDX.
So with exception of a slightly lower yield, BOND is easily the better version of the Pimco Total Return fund, compared to PTTDX, at least in the past three years.
How the BOND ETF Beats the PTTDX Mutual Fund
The superficial difference between BOND and PTTDX is a common one among ETFs as compared to their actively managed mutual fund counterparts: The expense ratio is lower. This provides a small advantage for ETFs over mutual funds.
But the difference in expenses between BOND and PTTDX is only 0.18%, while the gap in performance is much wider. Why is this, you ask?
Another advantage for ETFs is their liquidity. Consider the gap in performance in 2014, when the BOND ETF jumped 6.6% in price, whereas the PTTDX mutual fund gained only 4.4%. Both are essentially the same portfolio and there’s not much difference in expenses. But the efficiency of trading like a stock throughout the day for ETFs, as opposed to trading at the end of the day for mutual funds, can be more of an advantage in volatile markets.
And considering the fact that outflows for all share classes of Pimco Total Return were hugely negative in 2014, the liquidity of BOND was a big factor in its better performance that year.
Whether or not BOND will continue as the best version of Pimco Total Return to hold in the long run remains to be seen. But if the next handful of years plays out anything like that past three, BOND may be the better bet, especially for investors with taxable accounts.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
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