PIMCO Total Return ETF (BOND), which has outperformed its bond benchmark and mutual-fund counterpart, is turning one year old on March 1.
From its inception through Feb. 14, the BOND ETF outperformed the Barclays U.S. Aggregate Bond Index by 10 percentage points and beat the flagship Total Return Fund by 5 percentage points, reports Elizabeth Ody for Kiplinger. PIMCO bond guru Bill Gross manages both the mutual fund and the ETF.
PIMCO Total Return ETF, which has gathered $4.1 billion in assets in under a year, does not use derivatives, compared to the mutual fund, which holds $286 billion in assets. The Securities and Exchange Commission banned the use of derivatives in new actively managed ETFs at the time of BOND's inception.
"We're glad to have BOND around because it proves that derivatives aren't the secret to PIMCO's secret sauce," Gross said in the article.
The SEC, though, lifted the moratorium on derivatives in actively managed ETFs in December. However, Gross does not anticipate incorporating a lot a derivatives into the ETF.
"PIMCO is becoming less and less of a derivatives firm," Gross says in the report. "Not because we've been chastened but because there's no high-grade octane in most derivatives anymore."
For example, the Total Return mutual fund only has about 2% of its assets in futures, compared to the historical range of 20% to 25%, and swaps currently make up 1%, compared to the historical 10% to 15%.
The outperformance of the BOND ETF is largely attributed to the lack of legacy positions, and the ETF has been more flexible in its asset allocation.
Looking ahead, Gross believes the ETF will able to navigate a rising rate environment as he would invest in more foreign bonds and buy Treasury inflation-protected securities.
"There wouldn't necessarily be a bear market everywhere," Gross added.
Additionally, Gross warns that investors should not expect strong price gains as long-term interest rates remain low.
"And that doesn't mean a bear market," Gross said. "That just means returns are much lower than bond investors are used to."
Max Chen contributed to this article.
Additional disclosure: Tom Lydon's clients own BOND