S&P: Pimco Total Return ETF Won’t Be Cheap

February 29, 2012

S&P knocks Pimco Total Return ETF’s relatively high expense ratio.

Standard & Poor’s, cutting through the excitement coursing through the world of ETFs, is cautioning investors from rushing into the Pimco Total Return ETF (NYSEArca: TRXT) that’s launching tomorrow, arguing that the ETF’s expense ratio is more than twice the average of the 10-largest fixed-income ETFs already on the market.

While TRXT’s 0.55 percent annual expense ratio is 30 basis points less than the 0.85 percent total expense ratio for “A” class retail mutual fund shares of the $250 billion Pimco Total Return Fund (PTTAX) on which the ETF is based, that’s a lot more than the 0.25 percent average price of those 10 largest ETFs. Those ETFs together have more than $133 billion in assets, according to the MarketScope Advisor research note written by S&P Capital IQ ETF Analyst Todd Rosenbluth.

S&P also sounded a cautionary note on the returns front, saying the ETF version of the Pimco Total Return Fund won’t be able to make use of derivatives and will have to report holdings daily, which will take away two of the advantages of the mutual fund. Active mutual funds only report holdings quarterly, and often do so with a lag. Rosenbluth also noted that while the fund has had above-average five- and 10-year annualized returns, it underperformed intermediate investment-grade peers in the 12 months ended Feb. 24. PTTAX’s total returns have averaged 6.85 percent in the past 10 years.

Rosenbluth said that the largest fixed-income ETF, the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) costs just 0.20 percent, and the next-largest fixed-income ETF, the iShares iBoxx Investment Grade Corporate Bond Fund (NYSEArca: LQD) has a total expense ratio of 0.15 percent. The least expensive of the 10-largest fixed-income funds is the Vanguard Short-Term Bond Index ETF (NYSEArca: BSV), which has a total expense ratio of 0.11 percent, he said.

Still, he argued that TRT is launching at a propitious moment for fixed-income ETPs, which saw a record $7.4 billion in inflows in January, S&P said. However, most of those inflows went into passively managed funds, and TRXT is technically part of the actively managed space, which represents only 1.3 percent of the $195 billion in total fixed-income ETPs. More broadly, active ETFs have garnered about 0.5 percent of the $1.2 trillion in total U.S.-listed ETF assets.

Perhaps Bill Gross’s legendary investing acumen running the Pimco Total Return Fund will turn TRXT into a powerhouse, and siphon market share from the large passively managed fixed-income ETFs.

But don’t bet on it. Rosenbluth predicted that any potential success of TXRT will come more from a general increase in investor appetite for fixed-income ETFs.


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