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Filed Under:Life Insurance, Life Planning Strategies

For Sale: Active Management 50% Off at PIMCO

The new PIMCO Total Return ETF charges annual expenses of just 0.55% vs. the PIMCO Total Return Fund, which charges 0.90% for the waive-load shares

As more money managers jump into the ETF business, financial advisors and their clients are being offered the bargain of a lifetime: Funds managed by established managers with rock bottom fees.

BillGrossThe recently launched PIMCO Total Return ETF (BOND) charges annual expenses of just 0.55% and is managed by highly regarded Bill Gross (left), the co-chief investment officer and founder of Pacific Investment Management Co. By comparison, the $252 billion PIMCO Total Return Fund (PTTAX), which is also managed by Gross, charges just 0.90% for the waive load shares. For cost conscious investors, going with BOND versus PTTAX adds up to almost 40% savings in annual fees.  

What about performance? Although BOND doesn’t have any performance history to speak of, Gross has already proven his acumen with other bond funds that he manages.  

Another advantage of BOND is its much smaller size. With just over $500 million in assets, Gross can invest in ways that a much larger fund like the PIMCO Total Return Fund can’t. For instance, BOND can take sizeable positions in corporate bonds without disrupting or influencing the market, whereas his behemoth $252 billion Total Return Fund would likely be forced to use derivatives.   

BOND owns 294 bonds with an average effective maturity date of just over 7 years and the fund’s distribution yield is 1.44%. The bulk of assets are invested in U.S. government bonds and mortgage backed securities.

Actively managed ETFs like BOND are required to disclose their holdings daily whereas mutual funds aren’t. Although ETF managers try to prevent front-running by high speed traders looking to make a quick buck at their expense, there’s never a guarantee managers can keep their ETF portfolio trades a complete secret.

While the transparency of active ETFs is commonly lauded, in reality, it’s not much of advantage for ETF managers or their shareholders.

Limiting the negative impact of investment costs for clients has always been an important chore for advisors.

Nowhere is this truer than with bond funds, which have largely failed to outperform lower cost bond index ETFs.

Standard & Poor’s 2011 scorecard of active managers versus indexes showed 63.33% of all actively managed global income bond funds failed to beat their benchmark.

Almost 90% of actively managed intermediate government bond funds and 75.51% of short-term government bond funds were also beaten by corresponding government bond yardsticks.

Among the 1,424 U.S. exchange-traded products, just 43 are actively managed. The largest bond ETF is the $22.49 billion iShares Barclays TIPS Bond Fund (TIP).

It’s still too early to tell if BOND will be able to outperform actively managed bond funds with a longer historical track record. But with substantially lower costs, BOND’s chances of outperformance are much better.  


Ron DeLegge is the editor of and Author of “Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators and the Media.” (Half Full Publishing Group, 2011)

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