The PIMCO Total Return ETF (Ticker: BOND) is supposed to be the ETF version of the the most popular bond mutual fund in the world, the PIMCO Total Return Fund. The ETF and Mutual Fund share the same portfolio manager (Bill Gross) and are managed using the same strategies. However, the returns for the two funds have not been the same. Over the last three months, the PIMCO Total REturn ETF has returned 3.67%, versus 2.52% for the mutual fund. The ETF has outperformed the fund by over 1%.
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When the PIMCO Total Return ETF was first launched in March, it had much better returns than the mutual fund. Many analysts thought this difference in performance would go away with time. The idea is that the holdings of the ETF would, over time, mirror the holdings of the mutual fund. While the ETF took in assets and was in expansion mode, there would temporarily be differences between the two as the ETF would have more flexibility in entering new positions. However, the PIMCO Total Return ETF is now 10 months old and asset growth has slowed, yet the two still have very different portfolios.
|Data as of 10/31||BOND ETF (% of Assets)||PIMCO Total Return Funds (% of Assets)|
|Mortgage Related (MBS)||41%||47%|
|Investment Grade Corporate Bonds||9%||11%|
|High Yield Bonds||5%||3%|
As you can see, the portfolios are very different. The PIMCO Total Return ETF currently holds much less Treasuries and Mortgage Backed Securities than the mutual fund. However, it holds more debt in developed countries (typically foreign govt bonds), more municipal bonds, and more cash.
Here are some theories:
1) The BOND ETF is smaller and more nimble than the mutual fund. The mutual fund is over 70 times larger than the ETF. ($281 billion in assets compared to $3.8 billion). Relatively quickly, PIMCO can alter the assets of the Total Return ETF without having a huge impact on the market. However, the size of the mutual fund makes it difficult to make changes quickly without their actions affecting the market. As a result, changes in asset allocation numbers often show up in the ETF numbers first, even though they both may have started buying or selling at the same time.
2) Starting point bias. Bill Gross and his team are constantly asking themselves the question: what is the best opportunity right now? The answer to that question may be different for “cash” and a large existing portfolio. With a large existing portfolio like the Total Return Mutual Fund you have to consider both the new position you are considering, and existing positions that may need to be closed out in order to initiate that new position. Since the PIMCO Total Return ETF is getting a huge portion of its assets in new money coming into the fund they can focus on exploiting new opportunities with these funds without having to exit existing positions.
The PIMCO Total Return ETF and Mutual Fund are likely to have very different portfolios for the next several years and therefore different performance as well. One Easy Reason Why BOND should do better than PIMCO Total Return Fund: Fees The annual expense ratio for BOND is 0.55% versus 0.85% for the A shares of the mutual fund. The fee difference is even more dramatic for new investors as the mutual fund has a big load charge. You can learn more about bond fund fees here.
Bottom Line: If you are comparing the PIMCO Total Return Fund to the PIMCO BOND ETF, I highly recommend choosing the BOND ETF.