Friday, January 27, 2012

What’s all the Hoopla about Bill Gross’ Total Return ETF?

What’s all the Hoopla about Bill Gross’ Total Return ETF?

In the bond arena, when you say “Bill Gross”, 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 (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 with the announcement that on March 1, 2012, he is launching an almost-cloned version of his mutual fund with his total return exchange-traded fund (TRXT). It won’t be exactly the same as the mutual fund, because 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, as I mentioned in ETFs: Love 'Em or Leave 'Em? | InvestorPlace
·       Diversification. As I said in my recent article, InvestorPlace » Portfolio Protection Step 3: Diversification Comments Feed, 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 ten years, and 8.63% average for five years. That handily trounces his peers, who saw gains of 5.27% and 5.89% for ten 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 very first time since 1993 that the fund had an outflow, about $5 billion.

Now back to the total return ETF (TRXT). 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%, some 40 basis points less expensive than the fund version, although institutions will be able to knock that cost down to about 0.46%, similar to the mutual fund expense ratio. ETFs have cost advantages due to no 12b-1 fees or loads that mutual funds generally incur.

According to, there are about 15 in its total bond market category, with an expense ratio averaging 0.26%, so TRXT will cost more. 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.

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