Gross losing to himself as ETF avoids gridlock

Smaller ETF has returned more than twice its larger sibling since March 1

Asset Breakdown

“Once you get to a certain size, your ability to add value is constrained almost by definition,” Baha said. “If you believe in the efficient-market theory, the bigger you get the more difficult it is to add value because your choices are more limited.”

About 10.6 percent of the assets in Pimco’s Total Return ETF are corporate debt, compared with 19.9 percent for the firm’s eponymous mutual fund, Bloomberg data show. The ETF has 29.5 percent of its funds in government debt, versus 20.9 percent for its older counterpart. Almost 23 percent of the ETF’s assets are in cash and other investments, compared with 14.4 percent for the Total Return Fund.

Unlike Pimco’s Total Return mutual fund, which uses a combination of options, futures and swap agreements, Gross’s ETF can’t invest in derivatives since the U.S. Securities and Exchange Commission has frozen approval of new ETFs that make significant use of the instruments. Should the SEC lift the temporary ban, the Total Return ETF would invest in derivatives, Pimco said in its filing last year.

Minimum Investment

While the Pimco Total Return Fund has returned 1.24 percentage points more than its benchmark index in the past four months, the ETF, which trades under the ticker BOND, has outperformed by 4.7 percentage points, Bloomberg data show.

Investors may evaluate a fund’s performance after a relatively short time if the company, team, investment process and philosophy are the same as an existing fund with a live track record, said Cleo Chang, a managing director at Wilshire Associates, a Santa Monica, California-based consulting firm.

“It is not necessarily a critical factor to wait until a new fund has a year or two of track record as long as there’s a preexisting static investment strategy,” she said in a telephone interview. She declined to comment specifically about Pimco.

The institutional share class of the Total Return mutual fund, which requires a minimum investment of $1 million outside of retirement accounts that make it available, has an expense ratio of 0.46 percent, or $46 a year for each $10,000 invested. The Total Return ETF will charge fees of 0.55 percent, Pimco said in a filing with the SEC.

Bloomberg News

--With assistance from Alexis Leondis and John Parry in New York, Eric Balchunas in Princeton, N.J. and Patricia Kuo in London. Editors: Shannon D. Harrington, Faris Khan

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