(May 31st, 2012) On March 1st, PIMCO rocked the Mutual Fund world with the launch of an ETF version of the PIMCO Total Return fund, the largest mutual fund in the world. Since that time the ETF, which trades under the symbol “BOND”, has lived up to the hype. In the first three months since its inception the PIMCO BOND ETF has seen over $1 Billion in new money, the best start for an actively managed ETF ever. Perhaps more surprisingly however, is the fact that the BOND has outperformed the PIMCO Total Return fund which it is designed to track, by close to 2%. This is a huge number in today’s low interest rate environment, and one that has investors in the Total Return Fund wondering: Am I missing out?
If an investor is basing the decision solely on the performance over the last 3 months, the answer is probably no. The size advantage of the ETF over the Mutual Fund is likely to exist for quite some time. However, the BOND now has established positions and no longer benefits from starting fresh.
Regulations also prohibit the ETF from using derivatives in the strategy, so the ETF has to gain exposure through buying individual bonds only. While this is not a problem in an environment of declining interest rates (like we have seen since March), it is unclear how this would affect the ETF’s ability to deal with rising interest rates. This fact, combined with the short history of the ETF so far, makes me inclined to take a “wait and see” approach before making any changes to an existing portfolio.
If you are investing through a financial advisor that makes their money by charging an upfront fee to invest in mutual funds (called a “load”), then you will likely save a substantial amount of money by choosing the BOND ETF over the PIMCO Total Return Fund. The commission that an advisor charges for stock and ETF trades is almost always substantially lower than what the investor will pay when charged a load on a mutual fund.
If an investor is going through a financial advisor that charges based on assets under management, or an online broker, then the answer depends on how much money they have to invest. If you are planning to invest more than $1 Million, then you can access the Total Return Mutual Fund at an annual expense ratio of .46% of assets under management. This saves you 10 basis points over the ETF, which has an expense ratio of .55%. If you have less than $1 Million to invest in the strategy, then you will be charged somewhere between .75% and .85% per year when investing in the Mutual Fund, so you will do better from an expense standpoint by going with the ETF.
For more on PIMCO visit the PIMCO Funds section of Learnbonds.com