PIMCO Total Return: ETF Or Mutual Fund?

May.16.12 | About: PIMCO Total (BOND)

PIMCO Total Return ETF (NYSEARCA:BOND) is known as the exchange traded fund version of the famous Total Return (MUTF:PTTRX) mutual fund - both are managed by bond guru Bill Gross. Although the ETF has only been trading for 2.5 months, the latest version of Bill Gross's strategy has outperformed.

"It is the fastest-growing active ETF ever, with more than $700 million in assets. BOND has not had the liquidity issues that some new ETFs have when they are brand new. It has a high average trading volume of more than 200,000 shares per day and bid/ask spreads of two US cents or less most of the time. To top it off, the ETF was launched right as the Total Return strategy was outperforming the market," Timothy Strauts for Morningstar wrote in a recent article.

So, how does the ETF version compare with the original mutual fund? To compare, the mutual fund has returned 1.84% from February 29 through May 4, when BOND began trading. In comparison, BOND has returned 4.1% over this period, bettering the mutual fund by 2.26%, reports Strauts.

There are two major factors why BOND has outperformed its predecessor, over the short amount of time. First, BOND does not use derivatives in its portfolio, and ETFs in general, are restricted from using these tools in any future launches. This makes it so the funds are on opposite sides of the spectrum regarding portfolio make-up and total number of holdings. BOND invests directly in bonds.

On the other hand, PTTRX gets various bond exposures through swap agreements. Getting bond exposure through a swap agreement limits one's ability to pick out individual credits because the swap often is based on a broader index. Therefore, re-allocating assets becomes expensive and risky for the portfolio manager, and can have a negative impact upon the market.

Secondly, when BOND was forged with about $10 million in assets under management. Gross was able to begin with a clean slate that had no "legacy positions". The recent outperformance shows how a highly skilled active manager can add tremendous value in a small portfolio. BOND has about 300 positions, compared to the mutual funds' 19,000 holdings.

However, it is best to be cautious before jumping into BOND and overlooking all else. The track record is very short for the ETF version of the Total Return Strategy. Things can turn fast in the bond market, as well as the stock market.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.