Why PIMCO Total Return ETF Is Beating Its Mutual Fund Counterpart

| About: PIMCO Total (BOND)
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PIMCO Total Return ETF (BOND) is outperforming its mutual-fund cousin although both portfolios are overseen by legendary bond manager Bill Gross.

Why the difference in returns? Apparently, size matters. The ETF is off to a fast asset-gathering start after launching in March but is still nimble compared with the massive PIMCO Total Return Fund. As a result, market impact is less of an issue for Gross in the ETF version.

After the bond guru launched the ETF a couple of months back, BOND has more than doubled the performance of PIMCO's bulky flagship fund.

From inception, the BOND ETF has gathered $1.79 billion in assets and gained 6.2%. The ETF has an expense ratio of 0.55% and a 2.61% 30-day SEC yield.

In comparison, the PIMCO Total Return Fund Institutional (MUTF:PTTRX) has $263.4 billion in assets and returned 3.2% since March 1. PTTRX has an expense ratio of 0.46% and a 3.02% 30-day SEC yield.

Observers point to the hefty size of the Total Return Fund as a key difference.

"It's very difficult to beat the market when you are the market," Bonnie Baha, head of developed credit at DoubleLine Capital LP, said in a Bloomberg article. "Any choices you make will have an outsized impact when you're smaller and more nimble. It stands to reason that there will be more opportunities that you can take and fly below the radar."

The funds have grown as investors have a taken a greater interest in fixed-income assets, which have attracted $35.1 billion over June.

While investment-grade trading volumes dipped to a daily average of $11.4 billion in June, this year's low, trading volumes in the largest bond ETFs increased 4%. The Total Return Fund added $1.4 billion in June, whereas the ETF version saw $498.4 million in new inflows.

"Once you get to a certain size, your ability to add value is constrained almost by definition," Baha added in the Bloomberg story. "If you believe in the efficient-market theory, the bigger you get the more difficult it is to add value because your choices are more limited."

PIMCO Total Return ETF

Max Chen 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.