The PIMCO Total Return Exchange-Traded Fund (TRXT) began trading March 1, 2012. Prior to its launch, TRXT became the most highly anticipated ETF introduction since the MacroShares Major Metro Housing Up/Down pair (UMM and DMM) burst onto the scene. The arrival of TRXT has been hailed as the death of the mutual fund, a turning point for actively-managed ETFs, crossing the Rubicon, an active ETF game-changer, along with countless other high-expectation phrases.
Many might argue that the TRXT pre-launch hype exceeded that of UMM/DMM, but I believe UMM and DMM still hold that title. After all, MacroShares held pre-IPO road shows, fooled Time Magazine into naming it one of the “Best Inventions of 2008” more than six months before the launch, and somehow convinced advisors and analysts to write glowing pre-launch articles about how great these products were going to be.
MacroShares soon learned how difficult it would be to live up to such lofty expectations. Contrary to popular belief, MacroShares didn’t track the Case-Shiller Index. This failure to meet investor expectations contributed to their early termination, which happened to be a costly lesson for investors.
Am I predicting that TRXT will go down in flames like UMM and DMM? No, not at all. TRXT will more than likely be a successful product by ETF standards. However, with expectations set so high, there are bound to be some disappointments.
First, PIMCO Total Return ETF (TRXT) is not an ETF clone of PIMCO Total Return (PTTRX), the world’s largest mutual fund. They do have very similar product names and both have Bill Gross as the named manager. According to Morningstar, Bill Gross is the manager for 115 mutual funds (the count is only 25 when multiple share classes are eliminated) and oversees hundreds of billions of investments. One has to wonder how much of his time will actually be spent managing TRXT.
Second, the ETF cannot hold derivatives while the mutual fund makes generous use of them. If the derivatives are not beneficial to the mutual fund, then why are they being used?
Third, the ETF has 124 total positions while the mutual fund has more than 16,000 holdings. You can do the math.
Fourth, the ETF creates and redeems shares via in-kind exchanges while the mutual fund creates and redeems in cash. This forces the mutual fund to incur additional expenses and potentially impacts tax efficiency.
Fifth, the ETF has a 0.55% expense ratio while the mutual fund expense ratio depends on share class (0.46% to 1.60%).
Finally, transaction fees are broker dependent, but the broker omnibus accounts allow investors to bypass the minimum dollar amounts. If you open a mutual fund account directly with the mutual fund company, then typically there are no transaction fees. Apparently Bill Gross forgot to tell his mother these facts when she complained that brokerage-firm minimums stopped her from buying his mutual fund. I usually recommend PIMCO Total Return Class D (PTTDX) for clients using brokerage accounts.
Top holdings of TRXT include FNMA TBA 4.0% Apr 2042 11.8%, FNMA TBA 3.0% Mar 2027 10.9%, FNMA TBA 4.5% Apr 2042 10.3%, U.S. Treasury Note 0.875% Dec 2016 10.1%, and U.S. Treasury Note 0.25% Feb 2015 10.0%.
Yield, duration and other portfolio data points are not available. If you believe it will be a clone of the mutual fund, then expect a 30-day SEC yield of 2.7% and a duration of 6.3 years.
To learn more about TRXT, please refer to the TRXT snapshot, fact sheet (pdf) and prospectus (pdf). There will be no shortage of information and analysis on TRXT in the future. It will probably be the most analyzed ETF for the next year or more.
Bottom Line: TRXT will likely have performance results similar to the mutual fund version. Tax efficiency, brokerage costs, expense ratios and portfolio holdings will all play a role in the performance differences. The best choice for you will be dependent on your particular situation. If you are a current investor in the mutual fund, there is no need to take immediate action. You will have plenty of time (months or maybe even years) to evaluate the ETF version and to determine how your “net results” may be affected by moving from the mutual fund to the ETF version.
Disclosure covering writer, editor and publisher: Long PTTDX. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.