3 ETFs To Replace PIMCO Total Return In Your Portfolio

Includes: AGG, BIV, SPAB
by: Dave Dierking, CFA


PIMCO Total Return managed by bond king Bill Gross has seen almost $50 billion leave his fund as a result of recent poor performance.

Complicating matters, Mohamed El-Erian, Gross's co-chief investment officer, resigned unexpectedly recently fueling speculation that he and Gross were at odds.

Investors looking for a change can find ETFs with similar risks and compositions that have performed better and maintain lower expense ratios.

ETFs from Barclays, Vanguard and iShares are profiled as alternatives to PIMCO Total Return.

Bill Gross has long been known as the bond king. He's been the driving force behind the PIMCO family of mutual funds that currently manages around $2 trillion. But poor performance in his PIMCO Total Return Fund (MUTF:PTTAX) and the unexpected departure of his co-chief investment officer Mohamed El-Erian have taken some shine off of the king's crown. After years of solid returns that built the fund into what was at one time the largest mutual fund in the world, recent performance has begun driving billions of dollars out the door.

Gross managed to rack up 13 consecutive years of gains for Total Return up until 2013 when the fund lost 2.3%. Looking at recent average annual returns and risk ratings, the fund now looks like an average, if not below average, investment. 2014's 1.3% first quarter return trailed 73% of peer funds. The fund's one-year return of -1.6% significantly trailed its benchmark's -0.1% return. Morningstar now rates the fund just 2 stars out of 5 over the 3-year period, noting high risk and below average returns. As a result, investors have been looking for better performance elsewhere, withdrawing a total of $41.1 billion in 2013 and another $8.2 billion so far in 2014.

To be fair, Gross is considered one of the smartest money management minds in the world and he should probably be given the benefit of the doubt given his long-term track record of success. But if you're one of those investors that wants to look for greener pastures, here are three ETFs for you to consider in its place. All three have a similar benchmark, risk profile and investment composition to Total Return and charge minimal expenses and fees to boot.

SPDR Barclays Aggregate Bond ETF (LAG)

Might as well start the list by looking at the benchmark by which Total Return measures itself.

As the benchmark, this ETF, not surprisingly, maintains a similar effective duration and weighted average coupon as Total Return and has a solid balance of government, corporate and securitized notes in its portfolio. Although this ETF maintains a higher average credit quality, it does hold credits across the full maturity spectrum just like Total Return.

Aggregate Bond's return beats Total Return on a 3-month (1.24% vs. 0.51%), year-to-date (2.39% vs. 1.73%) and 1-year (-0.44% vs. -2.23%) time frame (though, as mentioned above, the longer-term track record favors Total Return).

Its 2.10% yield also tops Total Return's 1.89%.

Vanguard Intermediate-Term Bond ETF (NYSEARCA:BIV)

This fund beats Total Return's average annual performance across all time frames from 3-month through 5 years. When that's the case, you should make sure the fund didn't take excessive risks to get those returns.

Average duration and effective maturity are about a year longer than Total Return and its beta of 1.03 versus 0.79 for Total Return confirms that this ETF is a bit riskier. Intermediate-Term keeps virtually all of its securities in the 5-10 year range but the average A credit quality for the portfolio is similar to that of Total Return and Vanguard's Sharpe Ratio of 1.17 versus Total Return's 0.93 indicate that it's been better at producing risk-adjusted total returns.

Its current yield of 3.02% also reflects the additional risk you'd be taking with this ETF.

iShares Core Total U.S. Bond Market ETF (NYSEARCA:AGG)

This ETF has a similar overall risk profile to Total Return - average duration, credit quality and weighted coupon - are all within a stone's throw of each other. The iShares ETF slides a little down the credit quality ladder to boost yield by eschewing most AAA rated bonds and focusing instead on AA rated notes. As a result, Core Total U.S. Bond Market has a current yield of 2.27%.

It also charges a razor thin expense ratio of just 0.08% allowing investors to keep more money in their pockets.


None of these ETFs is going to be a perfect match to PIMCO Total Return, but this list demonstrates that there are viable good-performing low-cost alternatives for investors looking to make a switch. Investing in ETFs over PIMCO also allows investors to avoid the onerous front-end sales charges that come with buying Total Return shares.

Bill Gross has a great long-term track record but recent lagging performance coupled with the potential in-house infighting means it is prudent to at least explore other options that are available.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.