On February 29th of this year the much anticipated PIMCO Total Return ETF (BOND) was launched. The ETF is designed to match the performance of the PIMCO Total Return Institutional Fund, and the strategy deployed is meant to mirror the management of the mutual fund.
The great thing about an ETF that is designed in this manner is that it allows you to see how the price of the ETF is performing in line with its actual strategy. Thus far, BOND has gotten ahead of itself. Between March 1st and the close of business on June 29th, BOND has gained 6.05%. Yet, the institutional shares (which are a true reflection of what the underlying assets have done) are only up 2.84% for the same period of time.
With all of the excitement surrounding the launch of BOND, and the chance to have your assets managed by the "Bond King" Bill Gross, it is easy to see how BOND has gotten ahead of itself. This excitement has simply caused a greater demand for the outstanding shares and as a result has sent the price of BOND higher than what the actual holdings have been able to achieve. I own both the fund and the ETF so I say bravo, but how can investors use the data to their advantage?
At this point in the time the difference in performance between BOND and the PIMCO Total Return strategy may be enough to make you pause before establishing a new position in the ETF, but there may also be a period of time when the price of BOND lags the performance of its mutual fund counterpart, and those periods may become periods of opportunity. Currently the love affair with Gross is back on, and who could blame investors as Gross has guided his fund to a gain of 5.75% for the first half of the year. This has more than doubled the performance of the U.S. Aggregate Bond Index for the first half of 2012. However, it is important for investors to keep an eye on times when Gross is out of favor.
I admit, he has not exactly provided much bulletin board material to criticize over the last decade, but when he does, shares of BOND may be affected in a negative manner. Take last summer for example. Gross admittedly made a mistake when he briefly bet against U.S. Treasuries early last year, and he was hammered in the press for it. This negative news had no impact on the actual holdings of the managed fund, but I guarantee you that we would have seen shares of BOND (if they had been trading at the time) react in a negative manner as investors sold shares and reacted to headlines. This could have created a great buying opportunity for BOND.
I would never discourage any investor from having Bill Gross manage a portion of their income oriented investments. However, I would encourage investors to compare the Net Asset Value (NAV) of the managed institutional PIMCO Total Return Fund to the PIMCO Total Return ETF before investing. Sometimes you may find hidden value in the ETF, and other times (like today) you may find that the price of BOND has gotten a little ahead of the performance of the underlying strategy.
Additional disclosure: I also own shares of the PIMCO Total Return Fund D shares