All Abuzz About Pimco’s TRXT

February 28, 2012

The launch of Pimco’s Total Return Fund as an exchange-traded fund this week is looking like the biggest ETF event of the year, and rightly so.

After all, the Pimco Total Return Fund, with more than $250 billion in assets, is the biggest mutual fund in the world. A successful ETF version of the fund that helped make Bill Gross and his entourage in sunny Newport Beach, Calif. so famous could clearly be a game changer in a number of ways.

So, everybody’s talking about it—from bloggers to storied financial publications, including "The Economist," which published a piece called “Cheaper Bill,”—a clever allusion to the fact that the Pimco Total Return ETF (NYSEArca: TRXT) will cost 0.55 percent a year, or 30 basis points cheaper than the retail version of the mutual fund.

For the record, the institutional version of the mutual will be cheaper than the ETF, at 46 basis points, but the retail version is probably the fairer comparison for most ETF investors who may not be buying in size.

A More Active Future?

Probably the biggest variable on the line in this whole story is whether TRXT will redefine the fate of actively managed ETFs.

So far, for those who haven’t noticed, active ETFs have been pretty much of a bust. Around 0.5 percent of the nearly $1.2 trillion now invested in U.S.-listed ETFs is in active strategies, according to the numbers we look at every day.

Fittingly, one of the exceptions to the mostly dismal state of active ETF asset gathering has been “MINT,” the Pimco Enhanced Short Maturity Strategy ETF (NYSEArca: MINT). It’s a money-market fund proxy that has upward of $1.5 billion in assets, making it the single-biggest active ETF.

So, MINT looms as the first bogey TRXT has to meet to gain even a modicum of credibility after it comes to market on March 1.

I think it’s fair to say most people expect the Total Return ETF to top MINT, quickly and pretty massively.

Not The Same Fund

But beyond the initial asset gathering, important longer-term issues hang over the fate of the new Pimco Total Return ETF—not least that it’s really not the same thing as the mutual fund.

First off, the only active ETFs approved by the Securities and Exchange Commission are transparent, meaning they have to disclose portfolio holdings each and every day.

Off the table for the new ETF is the quarterly disclosure requirement for actively managed mutual funds, with a lag time of up to 60 days. In other words, if TRXT has any “secret sauce” keeping it one step ahead of its competitors, it will really be quite diluted.

More crucially, the ETF won’t be able to use any of the derivatives that the mutual fund does, making it “Bill Gross Light,” the way I heard one analyst describe the new fund.

In practical terms, the returns of the two portfolios are likely to differ—by how much is really anyone’s guess. But the takeaway, again, is they’re really not the same fund.

End Of The Party?

A deeper question I wonder about is where the “total return” will come from in the coming years.

The Total Return Fund was launched in 1987, just after the secular bull market in bonds that’s lasted almost 30 years was getting under way. In the past 10 years, the mutual fund has had an impressive average annual total return of 6.85 percent. But is there any more room to go?

Today 10-year Treasurys are yielding about 2 percent. That’s pretty crummy yield for parking assets that far out on the yield curve, and it’s hard to imagine too much more price appreciation in a market with such low yields. Bill Gross basically said as much in his latest note.

I guess what I’m wondering is if the launch of the Pimco Total Return ETF could have come at a worse time—leaving Gross looking for yield in all the wrong places—or are we all about to discover just how good he really is?

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