Gundlach's TOTL Outpacing Pimco's BOND

In active management, portfolios can change with the wind, but for now, TOTL has the upper hand.

When it comes to actively trying to outperform the Barclays Aggregate Index, Jeff Gundlach’s SPDR DoubleLine Total Return Tactical ETF (TOTL) for now is outdoing the competing Pimco Total Return ETF (BOND | C), at least in the very short time it’s been on the market.

TOTL is barely four months old, but it seems that Gundlach’s preference for U.S. debt is behind the outperformance over BOND so far.

Since March 1, TOTL has slipped 0.3 percent as yields have risen. The benchmark 10-Year Treasury yield is up some 21 percent in that period. BOND, meanwhile, has faced losses of 2.4 percent during that time. BOND, the ETF version of the PIMCO Total Return Fund (PTTRX) created by Bill Gross, was launched in 2012. Gross managed the ETF for 2.5 years before his departure last year, but BOND is now run by Scott Mather, Mark Kiesel and Mihir Worah.

Relative to a passive strategy tracking the Barclays Agg index, such as the iShares Core U.S. Aggregate Bond ETF (AGG | A-98), BOND hasn’t done much since March 1 either. In fact, it has recently underperformed the passive strategy. AGG is down 1.9 percent, as the chart below shows:

Chart courtesy of StockCharts.com

Foreign Tilt

The difference in performance is linked to deep differences in exposure.

BOND has a significant tilt toward foreign debt—even more so that the Barclays Agg index itself—as it looks to offer more comprehensive exposure to the global bond opportunity set. In fact, as of early June, the U.S. represented only 64 percent of the portfolio’s duration weight.

Germany, Mexico, Canada, France, Switzerland and Spain also comprised the fund’s biggest duration bets.

Drilling Deep

To be more granular, as of early June, Germany represented roughly 21 percent of BOND’s duration exposure, with 7.8 percent market value exposure. That allocation implies BOND has a long position in longer-dated German bonds, according to Paul Britt, ETF analyst at FactSet.

For both Japan and the U.K., BOND seems to be shorting bonds in those countries. But those positions, much like Germany’s allocation—are all currency-hedged through currency futures. The fund is net short the euro, the yen, the pound and a basket of other currencies.

In all, BOND is net long 13 percent the U.S. dollar relative to a basket of currencies, because Pimco likes the dollar, but its views on other currencies aren’t as positive.

That doesn’t mean the portfolio manager is equally negative on foreign bonds denominated in euros, or yen, etc. Currency fundamentals and bond fundamentals often diverge, and the net short position in a basket of currencies reflects that view.

“In general, BOND has always been more actively involved with international bonds than TOTL,” Boris Valentinov, ETF analyst at FactSet told ETF.com. “It’s a classic approach that Bill Gross was famous for—leveraging PIMCO’s global expertise.”

TOTL’s US Focus

TOTL, meanwhile, is almost entirely focused on U.S. bonds. In fact, roughly 88 percent of the fund is tied to the U.S. The biggest holdings are Fannie Mae and Freddie Mac securities—mortgage-backed securities comprise roughly 54 percent of the mix.

“Jeff Gundlach has always been more focused on the U.S.—that’s what he cut his teeth on: finding ways to add alpha with analysis of the relative value of the different sectors in the U.S. bond market,” Valentinov said. “So this is not surprising at all.”

Different Slices Of The Yield Curve

BOND and TOTL also differ on what they like—and don’t like—across the yield curve.

Consider that 48 percent of BOND is in ultra-short-dated bonds with 0-1 year to maturity. The fund is actually net negative on one- to three-year bonds because portfolio managers prefer the ultra-short end as well as the longer end of the yield curve right now.

To be clear, that negative position (17 percent of the portfolio) in short-dated bonds is achieved through derivatives as a way to hedge long-bond exposure, and to get access to different points of the curve. By hedging out some of that exposure, portfolio managers can bring duration back to the target they are looking for. The overall portfolio has effective maturity of 5.6 years versus 7.7 years for the index. BOND's effective duration--a measure of its sensitivity to interest rates--is roughly 3.5 years, compared to the Barclays Agg's 5.7 years. 

The bulk of the bonds in TOTL fall in the 20- to 30-year bracket, which isn't all that surprising given that Gundlach has been vocal about his belief that rates in the U.S. have no reason to go up as the economy struggles to grow on its own. 

But the fund is also net long 1- to 3-year bonds, with an allocation of about 2.5 percent. Gundlach's goal is to keep TOTL's duration shorter than that of the Barclays Agg at about 3.9 years, according to State Street Global Advisors data. The portfolio also has an added dividend yield cushion against interest rate sensitivity.  

Yields Compared

In the end, BOND is shelling out 30-day yields of 3.35 percent in a portfolio that owns 487 securities, while TOTL is serving up 3.03 percent in 30-day yields, but a portfolio that owns more than 9,300 debt securities.

What’s crucial here is that these allocations for both BOND and TOTL can change on a dime because that’s the nature of active management. At the end of the day, the takeaway is that investors looking for alpha in an aggregate bond strategy have very distinct choices that can deliver different results.

The good news is that when it comes to choosing between BOND and TOTL, at least price isn’t a factor. Both ETFs have net annual expense ratios of 0.55 percent, or $55 per $10,000 invested. A passive choice such as AGG would cost you only 0.08 percent.

BOND is now three years old and has $2.61 billion in assets. TOTL has $600 million gathered since the fund came to market on Feb. 24, 2015.