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Can You Profit From PIMCO’s World of “Total Returns?”

“A giant step for ETFs.”

That’s how Morningstar’s Director of ETF Research, Paul Justice, describes the PIMCO Total Return ETF (NYSE: TRXT).

As I mentioned here a couple of weeks ago, TRXT is the brainchild of PIMCO Chief and “Bond King,” Bill Gross.

So why is it such a “giant step?”

First, it’s based on the hugely successful PIMCO Return Fund (Nasdaq: PTTRX) and represents PIMCO’s first ever foray into the exchange-traded fund market. But more importantly, it gives investors an easier, more flexible, cheaper way to profit from one of America’s most respected and legendary money managers.

As Gross told Yahoo!’s “Breakout” feature:

“We wanted to give investors the chance to purchase the Total Return fund or a replica of the Total Return fund through the New York Stock Exchange, to access a little more liquidity, and provide more of an ability to do in-and-out trading.”

And if the launch is any indication, this is proving a big draw among income-seeking investors…

PIMCO’s Hot Start in the ETF World

Just three weeks after TRXT debuted, it’s already gathered $103 million in assets and is trading over 226,000 shares per day.

With two-thirds of those assets used to buy fixed-income investments, it falls within PIMCO’s goal to offer “a diversified portfolio of high-quality bonds, actively managed to maximize return in a risk-controlled framework.”

And maximizing return is something that Gross has proved particularly adept at over many years.

Under his watch, he helped turn PIMCO’s initial $12 million worth of assets in 1971 into $1.3 trillion. And having run the $250 billion Total Return mutual fund since 1987, he’s notched a 22 winning years – versus just two losing years – with an average gain of 8.3% per year. That’s the fund from which TRXT will take its lead.

Let’s take a look at a couple of other pros and cons…

The “Secret Sauce” in PIMCO’s Profitable Recipe

Because ETFs are more transparent and offer better, more frequent information on their portfolio holdings than mutual funds (which typically only release updates on a monthly or quarterly basis), investors now have a much greater insight into Bill Gross’ thoughts through TRXT.

This benefit could also prove to be a drawback, however, as it will allow everyone else to see that information and act upon it, too.

But Gross doesn’t seem worried. He told “Breakout” that he’s confident investors won’t be able to “front-run” the ETF or “see a change in strategy or some type of nuance that would give away any of PIMCO’s secret sauce.”

Another factor to keep in mind, though…

The Mutual Fund and ETF Aren’t Created Equal

There’s a notable difference between the Total Return ETF and the $250 billion mutual fund. As Gross points out:

“Regulations prohibit the ETF from utilizing options, and futures, and swaps.”

These restrictions aren’t imposed on the mutual fund, so although Gross says these instruments “aren’t a considerable portion of the Total Return Fund,” TRXT won’t mimic it exactly. However, I don’t think he’d have launched the ETF in the first place if he knew this discrepancy would be a significant problem.

Nevertheless, TRXT will have to perform well to out-do its rivals. It currently has four competitors all trying to beat the benchmark Barclays Capital U.S. Aggregate Bond Index – the Vanguard Total Bond Market ETF (NYSE: BND), iShares Barclays Aggregate Bond Fund (NYSE: AGG), SPDR Barclays Aggregate Bond ETF (NYSE: LAG) and the Schwab Aggregate Bond ETF (NYSE: SCHZ).

The first two boast $105.3 billion and $14.7 billion in assets, respectively, and offer lower expense ratios than TRXT. But then again, they don’t have the same record of outperformance as Gross’ Total Return Fund.

As it stands, three weeks isn’t enough time to make a judgment on TRXT. It will be interesting to see how it performs against both the Total Return mutual fund over the longer term, as well as its index benchmark and competitors.

Best regards,

Martin Denholm

Martin Denholm

, Managing Editor

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